DSCR: Debt Service Coverage Ratio in Relation to HUD 232 Loans
In addition to LTV, or loan-to-value ratio, DSCR, or debt service coverage ratio, is one of the most important financial metrics that a lender will examine when deciding whether to approve a HUD 232 or HUD 232/223(f) loan . DSCR compares the annual cash flow from a property to it's annual debt se
HUD 232 Loans and Debt Service Coverage Ratio
In addition to LTV, or loan-to-value ratio, DSCR, or debt service coverage ratio, is one of the most important financial metrics that a lender examines when deciding whether to approve a HUD 232 or HUD 232/223(f) loan. DSCR compares the annual cash flow from a property to its annual debt service obligation, which includes principal, interest, and other related costs, including MIP.
How is DSCR Calculated?
DSCR can be calculated using the formula below:
DSCR = Net Operating Income (NOI) / Annual Debt Service
For example, if a property has an annual NOI of $3 million, and an annual debt service of $2.2 million, we can determine DSCR by dividing the NOI by the annual debt service, like so:
$3,000,000/$2,200,000 = 1.36x DSCR
What is the Minimum DSCR for HUD 232 Loans?
The minimum DSCR for HUD 232 loans is 1.45x. However, borrowers using a HUD 232 loan to build a new property will have some time to reach the required DSCR.
Related Questions
What is the Debt Service Coverage Ratio (DSCR) for HUD 232 loans?
The minimum DSCR for HUD 232 loans is 1.45x. DSCR is a metric used by lenders to determine the risk of providing a loan on an income-generating property. DSCR is determined by taking the net operating income (NOI) and dividing it by the property’s debt service (interest, principal, lease payments, etc.).
How does the DSCR affect the eligibility of a HUD 232 loan?
The Debt Service Coverage Ratio (DSCR) is one of the most important financial metrics that a lender examines when deciding whether to approve a HUD 232 loan. The minimum DSCR for HUD 232 loans is 1.45x. This means that the annual cash flow from a property must be at least 1.45 times the annual debt service obligation, which includes principal, interest, and other related costs, including Mortgage Insurance Premium (MIP).
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What is the minimum DSCR required for a HUD 232 loan?
The minimum DSCR for HUD 232 loans is 1.45x. This is according to this source.
What are the benefits of a HUD 232 loan with a higher DSCR?
A HUD 232 loan with a higher DSCR offers several benefits. A higher DSCR indicates that the property's net operating income is sufficient to cover the debt service, which is a key metric lenders use to assess the risk of default. A higher DSCR also allows for more flexibility in terms of loan-to-value ratios and debt service coverage ratios. For example, HUD's 221(d)(4) loan allows for some of the lowest debt service coverage ratios out there, with a minimum DSCR allowable for a market-rate property of 1.18x. By comparison, Fannie Mae typically requires a more conservative DSCR of 1.25x, with Freddie Mac loans allowing for minimums of 1.20x depending on the market. The minimum DSCR for HUD 232 loans is 1.45x. Source and Source
What are the risks of a HUD 232 loan with a lower DSCR?
A lower DSCR means that the property's net operating income isn't sufficient to cover the debt service. This can increase the risk of default, as lenders use DSCR to assess the risk of a loan. HUD is willing to insure loans on assets that may appear slightly riskier by allowing for a lower DSCR than other financing options. For example, Fannie Mae typically requires a more conservative DSCR of 1.25x, with Freddie Mac loans allowing for minimums of 1.20x depending on the market. The minimum DSCR allowable for a market-rate property with a HUD 232 loan is 1.18x. Source
It is important to note that borrowers using a HUD 232 loan to build a new property will have some time to reach the required DSCR. Source