What does the Debt Service Coverage Ratio evaluate?

The Debt Service Coverage Ratio (DSCR) primarily evaluates the cash available to meet current debt obligations. It is a financial metric used to assess a borrower's ability to generate enough income to cover their debt payments, including interest and principal. By calculating DSCR, lenders can determine whether a borrower produces sufficient income from their operations or personal finances to comfortably meet their debt obligations without overextending themselves.

A higher DSCR indicates that the borrower has a strong ability to pay their debts, while a lower ratio can signal a higher risk that the borrower may struggle to meet their payments. This makes the DSCR a critical tool for lenders in making informed lending decisions, as it reflects the financial health of the borrower concerning their debt responsibilities.

The other options refer to different financial metrics or ratios. For example, the first option talks about the borrower's income related to housing costs, which is more about affordability and does not reflect overall debt service capabilities. The second choice pertains to loan-to-value ratios that measure the risk of lending against an asset's value. Lastly, the total debt owed by a borrower is more of a straightforward count of liabilities rather than an evaluation of the cash flow necessary to service those debts.