What is a DCR or Debt Coverage Ratio?
"DCR" stands for "Debt Coverage Ratio" and it is critical to a successful multi-family or commercial loan. The DCR is the ratio of the net income generated by the property over the total payments of debt related to the property. The DCR is a measure of the cash flow characteristics of the property, not the borrower, and with a few exceptions most programs require DCR to be in excess of 1.15. DCR is so critical because it acts as a limit on the loan amount even, in many cases, restricting the total loan dollars more than the loan-to-value ratio. So, if the DCR requirement for a loan is 1.15, the net operating income must be at least 115% of the total loan payments. As a result, the higher the DCR, the lower the loan amount!