DSCR in Relation to the Freddie Mac SBL Program
DSCR, or debt service coverage ratio, is a commercial property metric that compares a property’s income to its annual debt service. Higher debt service coverage ratios generally indicate lower risk, so most commercial and multifamily lenders set a minimum DSCR for loan applicants. DSCR can be increased by extending a loan’s amortization, or, alternatively, offering a larger down payment to decrease the total loan amount.
In terms of the Freddie Mac SBL program, DSCR requirements range from 1.20x for amortizing loans for properties in top markets, to 1.50x for interest-only loans for properties in Smaller Markets, with a variety of other DSCR requirements for other properties. While one might think that borrowers taking out interest-only financing would be able to get larger loans due to lower DSCRs, in practice, this is not the case, as DSCR for I/O loans must be calculated as if the loan was amortizing.