REAL TidBits Series: Debt Service Coverage

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An important term and very timely topic right now in the real estate industry is Debt Service Coverage.  

Debt service is the loan against the property. Often with more expensive properties there is multiple levels of debt from 50% low interest rate to mezzanine debt, to 2nd or 3rd mortgages. Essentially it’s the full monthly payment that encompasses the whole costs of managing and servicing the property. It’s most important, but often unclear when it comes to investment properties.  

Lenders want to know if you borrow money against a property, they can be assured you can service the debt that you’re applying for. What are the factors lenders consider to establish the Debt Service Coverage Ratio (DSCR)? 

DSCRs are dramatically hindered and being affected by the rise in interest rates, which of course brings concern of refinance and default. Borrowers that have been squeaking by with low interest rate mortgages are going to find themselves upside down when they refinance.   

The financial crisis of 2008 was born out of large numbers of mortgages going into default, which means borrowers were not able to service their debt.  

So what is the quiet sentiment amongst bankers about what’s going to happen with these non-QM loans?   

And the real question remains… have we learned the crucial lessons we needed to from the great financial crisis? 

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