If you are taking out a loan, you may have heard the term “debt service.” Businesses are required to prove you have the income to meet debt service requirements. Individuals will have a debt service for loans like mortgages and student loans. Simply put, the definition of debt service is the amount of cash you need to cover the repayment of interest and principal.
How is Debt Service Figured?
First, you need to find a debt service coverage ratio calculator online. You’ll need to know the principal (how much you are taking out), the interest rate, your down payment, your interest rate per month, and the length of the loan in months. You plug all this into the calculator. The resulting number will be the monthly amount. Conversely, you can figure out how much you can pay or your needed down payment with the same formula.
If you have more than one debt, all those will be added together.
The next step will be to figure your debt service coverage ratio.
Figuring the Debt Service Coverage Ratio
In this step you will divide your total net income by your total debt service. The higher the number, the higher the odds that you will pay back your loans. If you have a debt ratio less than 1, you do not have sufficient income to “service the debt” or repay the loan. Most lenders require a DSCR over more than 2.
The math is a bit daunting and there are many steps to reach your DSCR. However, with a bit of effort and a good online calculator, you can figure out your DSCR and see if a loan is in your future.