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.