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A DSCR (Debt Service Coverage Ratio) loan is a type of loan often used in commercial real estate financing. The DSCR is a financial metric that assesses a borrower's ability to cover their debt obligations, including loan repayments. In the context of a DSCR loan, lenders evaluate the income generated by the property compared to the debt payments. The DSCR is calculated by dividing the property's net operating income (NOI) by the total debt service (loan payments). A DSCR above 1 indicates that the property generates enough income to cover its debt obligations, while a ratio below 1 suggests potential financial strain. Lenders typically prefer DSCR ratios above a certain threshold to mitigate the risk of loan default.
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