What is Debt Service Coverage?

Debt Service Coverage (DSCR) is a financial ratio that divides the net operating income by the total debt service. 

In the personal finance world, this ratio is used by bank loan officers to determine income property loans.  In an ideal situation, the ratio would be over one meaning that the property is generating enough income to cover its debt obligations.  If the debt service coverage ratio is a number less than one, say .85, the operating income is enough to cover only 85% of the loan.  This means that the borrower has to pay the remaining 15% from personal funds.

For example, say Mr. Smith is looking at an investment property with a net operating income of $30,000 and an annual debt service of $25,000.  The debt service coverage ratio for this particular property would be 1.2, meaning the property generates 20 percent more than is required to pay the annual mortgage payment.

Tags: debt service coverage, debt service coverage ratio, financial ratio, income property loans

What is a Non-Recourse Loan?

Loans are split into two different categories: recourse loans and non-recourse loans.  Normally, most people view loans as what are called recourse loans – loans that allow a lender to go after you personally for the total amounts that you owe, even after they’ve taken collateral.  The lender can take legal action against you, garnish your wages, and even levy your bank accounts.

Non-recourse loans differ from recourse loans in what exactly the lender can take after a defaulted loan.  A non-recourse loan is a loan that allows the lender to take only the collateral pledged for the loan.  If you default on say, a non-recourse home loan, the lender can only foreclose on the home. Unlike the recourse loan, the lender cannot come after wages or anything else besides what was put up as collateral for the loan.