PLUMCalculating DSCR on Seller-Financed Deals
Debt-service coverage ratio is the lender’s first gate — and it matters just as much when the seller is the lender.
What DSCR measures
Debt-service coverage ratio compares a property’s net operating income (NOI) to its total annual debt service:
DSCR = NOI ÷ Annual Debt Service
A DSCR of 1.25 means the property generates $1.25 of NOI for every $1.00 of principal and interest due. Most conventional lenders underwrite to a minimum of 1.20–1.25; a DSCR below 1.0 means the asset cannot cover its own debt payments from operations.
Why seller financing changes the math
When a seller carries a note, the debt service is no longer a bank’s amortization schedule — it is whatever the two parties negotiate. That flexibility cuts both ways:
- Lower monthly payments (interest-only periods, longer amortization, or below-market rates) can push DSCR comfortably above the bank’s threshold.
- Aggressive terms (short amortization, high rate, or a balloon) can suppress DSCR and make the deal unfinanceable for the buyer’s senior lender.
Structuring a note that clears
The cleanest structure is one that keeps the buyer’s total DSCR above 1.20 while still compensating the seller for carrying risk:
- Model interest-only for the first 24–36 months, then amortize over 20–25 years.
- Set a rate slightly above the senior lender’s, but below what a mezzanine or hard-money source would charge.
- Confirm the combined senior + seller debt service still leaves a DSCR cushion.
Run the numbers before you agree to terms: a seller note that looks generous can quietly sink a deal if the blended DSCR falls below the senior lender’s floor.