Confidential - Internal Distribution
Debt Service Coverage Ratio (DSCR) Examples
December 20, 2011
Actual Debt Service Coverage Ratio
Actual DSCR is the ratio of Underwritten Net Operating Income (UW NOI) to the annualized debt service.
UW NOI = Underwritten Effective Gross Income less Underwritten Total Expenses.
Annualized Debt Service = For full and partial interest-only, 30/360, and Actual/360 loans, use the Initial
Interest Rate multiplied by Actual Unpaid Principal Balance at Acquisition. For amortizing 30/360 and
Actual/360 loans, use the monthly payment as stated in the Note multiplied by 12.
Product Variations
Partial and Full Interest-Only Loans: The calculation will not include an amortization factor.
ARM Loans: The calculation will be based on the Initial Interest Rate.
Cooperatives: UW NOI = Actual Cooperative NOI Effective Gross Income less Underwritten Total
Expenses.
Supplemental Mortgages & Loans with Subordinate Debt (Combined): The ratio of UW NOI to
the annualized combined monthly payments of all existing loans. Combined monthly payments =
the combined current monthly payments for all supplemental, subordinate debt, and first liens (does
not include soft debt).
Debt Service Coverage Ratio (IO/ARM)
DSCR (IO/ARM) is the ratio of UW NOI to the debt service calculated as described below.
UW NOI = Underwritten Effective Gross Income less Underwritten Total Expenses.
Partial Interest-Only Loans: DSCR = UW NOI / annualized partial interest-only amortizing payment.
ARM Loans: DSCR = UW NOI / annualized monthly payment calculated using, the maximum lifetime interest
rate, if applicable, for ARMS with an embedded cap, or the variable underwriting rate for other ARMS (e.g.
Structured ARM) with an amortization factor.
Product Variations
Full Interest-Only Loans: DSCR (IO/ARM) will be the same as the Actual DSCR.
Amortizing loans with no Interest-Only Period: DSCR (IO/ARM) will be the same as the Actual
DSCR.
Cooperatives: UW NOI = Rental Equivalent NOI Effective Gross Income less Underwritten Total
Expenses.
Supplemental Mortgages & Loans with Subordinate Debt (Combined): The ratio of UW NOI to
the annualized combined monthly payments of all existing loans. Combined monthly payments =
the combined current monthly payments for all supplemental, subordinate debt, and first liens (does
not include soft debt).
© 2011 Fannie Mae. Trademarks of Fannie Mae. 12.19.2011 2
Sample Calculations
Product Type Actual DSCR DSCR (IO/ARM)
Fixed Rate Amortizing 1.55 1.55
Fixed Rate Amortizing
(Cooperative)
1.16 1.55
Fixed Rate Full Interest-Only 2.00 2.00
Fixed Rate Partial Interest-Only 2.00 1.55
ARM – Embedded Cap 1.55 1.14
Structured ARM 1.75 1.06
Chart shows the results from the examples below.
Fixed Rate Amortizing Loan
Loan Amount: $10,000,000
Interest Rate: 5.00
Term: 120
Amortization: 360
UW NOI: $1,000,000
Debt Service: $63,682, annualized $644,186
Actual DSCR: 1.55 = $1,000,000 / $644,186
DSCR (IO/ARM): 1.55
Fixed Rate Amortizing Loan (Cooperative)
Loan Amount: $10,000,000
Interest Rate: 5.00
Term: 120
Amortization: 360
Actual Cooperative NOI: $750,000
Rental Equivalent NOI: $1,000,000
Debt Service: $63,682, annualized $644,186
Actual DSCR: 1.16 = $750,000 (Actual Cooperative NOI) / $644,186
DSCR (IO/ARM): 1.55 = $1,000,000 (Rental Equivalent NOI) / $644,186
Fixed Rate Full Interest-Only Loan
Loan: $10,000,000
Interest Rate: 5.00
© 2011 Fannie Mae. Trademarks of Fannie Mae. 12.19.2011 3
Fixed Rate
Term: 120
Amortization: 0
UW NOI: $1,000,000
Debt Service: .0500 * 10,000,000 = $500,000
Actual DSCR: 2.00 = $1,000,000 / $500,000
DSCR (IO/ARM): 2.00
Fixed Rate Partial Interest-Only Loan
Loan: $10,000,000
Interest Rate: 5.00
Term: 120
Actual 360
Partial Interest-Only: 12 months
Original Amortization: 0
Amortization: 360
UW NOI: $1,000,000
Debt Service: .0500 * 10,000,000 = $500,000
Amortizing Debt Service: $63,682, annualized $644,186
Actual DSCR: 2.00 = $1,000,000 / $500,000
DSCR (IO/ARM): 1.55 = $1,000,000 / $644,186
ARM Loan – Embedded Cap
Loan: $10,000,000
Initial Interest Rate: 5.00 (Margin + Libor Rate)
Amortization: 360
Lifetime Max Interest Rate/Ceiling: 8.00
UW NOI: $1,000,000
Debt Service using initial interest rate: $53,682, annualized $644,186
Debt Service using lifetime max interest rate: $73,377, annualized $880,518
Actual DSCR: 1.55 = $1,000,000 / $644,186
DSCR (IO/ARM): 1.14 = $1,000,000 / $880,518
Structured ARM Loan
Loan: $12,500,000
Initial Interest Rate: 2.770 (Margin + Libor Rate)
Variable Underwriting Rate: 5.77 (Initial Interest Rate + Underwriting spread + Cap Cost)
© 2011 Fannie Mae. Trademarks of Fannie Mae. 12.19.2011 4
Applicable Fixed Rate for Same Term Mortgage: 4.95
Term: 120 months
Amortization: 360 months, using a straight line over the loan term based on the Applicable Fixed Rate
Fixed Principal Payment: $18,655 (1
st
payment date of Jan 2012)
Lifetime Max Interest Rate/Ceiling: None
Underwritten NOI: $1,000,000
Debt Service using initial interest rate: Interest (12,500,000*2.770%/12=$28,854) plus Fixed Principal
($18,655) equals $47,510, annualized $570,118
Debt Service using variable underwriting rate: Interest (12,500,000*5.77%/12=$60,104) plus Fixed Principal
($18,655) equals $78,760, annualized $945,118
Actual DSCR: 1.75 = $1,000,000 / $570,118
DSCR (IO/ARM): 1.06 = $1,000,000 / $945,118
It is possible for the DSCR (IO/ARM) to be less than 1.0 due to differences in the interest rates used
to calculate the principal payment and the interest due.
The fixed principal payment is not included in the calculation for Actual DSCR for Partial Interest-
Only loans.