# How to Calculate a DSCR

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Lenders use the debt service coverage ratio (DSCR) to measure the ability of a borrower to repay on a loan. In personal finance, it is most commonly used to determine the loan amount for income-based loans. A ratio of 1 means that the net income of an individual is enough to pay for 100% of the value of the loan. Generally, lenders prefer a ratio over 1.

Define your property variables. Let's say you would like to buy a commercial property worth \$500,000. The gross rent from the property yields \$250,000 annually, and average vacancies are 10 percent or \$25,000. All other maintenance expenses are \$25,000.

Define loan variables. You are requesting a \$1,000,000 loan over the next five years at a rate of 10 percent. The annual payment is \$100,000.

Calculate net income. Gross income equals gross rent (\$250,000) minus average vacancies (\$25,000) minus all other expenses (\$25,000). The net income is \$200,000.

Calculate the debt service ratio. Divide net income (\$200,000) by the loan payment (\$100,000). The answer is 2.

Analyze the ratio. The income generated from the property is 2 times the amount of the loan repayment.

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