How DSCR (Debt Service Coverage Ratio) Affects the Loan Amount

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With valuations at all time highs, many properties aren’t able to support a lender’s minimum debt service coverage requirement at the maximum loan-to-value (LTV). When a property’s debt service coverage ratio (DSCR) is below the minimum at a lender’s maximum LTV the loan amount must be reduced to maintain the minimum DSCR.

When this happens, it’s referred to as the loan amount being debt service constrained.

With a debt service constrained loan amount a lender will reduce the loan amount until the minimum DSCR is achieved. The reduction can be slight, or it could be significant. In general, a property with a higher cap rate will be able to support a higher loan amount and LTV than a property with a lower cap rate.

For example, cities like San Francisco, Seattle, New York and Miami are all considered top or prime markets. In top markets lenders are willing to provide more advantageous loan terms – lower rates, higher LTV, and lower DSCR. Maximum LTV in top markets can be up to 80%.

In the case of an acquisition, it would seem that larger down payment requirements for higher price point markets would be mitigated by higher LTVs. But this isn’t necessarily the case. 80% LTV is great, but if the DSCR is .98 at 80% LTV than the property’s net operating income (NOI) isn’t sufficient to service the debt at 80% LTV.

When NOI isn’t sufficient to service the debt (debt service constrained) at the requested loan amount, or maximum LTV, the loan amount is reduced until the minimum DSCR is met.

It would seem then LTV has no relevance with DSCR constrained loans since DSCR determines the loan amount. But this isn’t always the case. Many lenders will provide lower rates for loans with lower LTVs.

With the Freddie Mac SBL Multifamily Loan program, Freddie Mac provides interest rate discounts for loans with lower LTVs – even if the loan amount is at the minimum DSCR. A borrower could expect to get up to a 12 bps discount off standard interest rates for lower leveraged loans.

But this isn’t always the case. Under the Fannie Mae Small Loan and DUS Conventional loan programs, Fannie Mae requires a property to meet both higher DSCR and lower LTV requirements to receive an interest rate reduction.

CMBS and insurance company lenders, as well as many banks, tend to treat lower LTVs as Freddie Mac does – lower rates for lower leveraged transactions even if the DSCR is at the program minimum.

If you would like CREFCOA to spread the numbers and determine how large of a loan a property could support on a cash out refinance, or on a potential acquisition, we will require the following documents:

  • Most recent two years and year-to-date property income and expense statement
  • Current rent roll
  • 12-month operating budget for acquisitions

Complete a loan request summary here. You will receive an email with contact information for your assigned loan specialist and you can email the documents for review.

Doug Solether
Managing Director
CREFCOA