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Commercial
Mortgages - The Three Ratios
Most of real estate lending can be boiled
down to the results of three ratios: The bulk of the energy spent
"processing" a loan is merely an attempt to verify the numbers
that go into the numerator and denominator of the above 3 ratios. The first ratio that lenders use is
the Loan-To-Value Ratio (LTVR) defined as follows: Loan-To-Value Ratios seldom exceed 80%
because the lender always requires some extra protection against default. The second ratio that lenders use when
underwriting a loan is the Debt Ratio. The Debt Ratio compares the
amount of bills that the borrower must pay each month to the amount of
monthly income he earns. More precisely, the Debt Ratio is defined as: Obviously someone who has a Debt Ratio is
150% is in trouble. A Debt Ratio of 150% would mean that a borrower's
obligations are one and a half times his income. Debt Ratios seldom are
allowed to exceed 40% in practice. The third ratio that lenders use is the
Debt
Service Coverage Ratio (DSCR). The Debt Service Coverage Ratio is a
sophisticated ratio only used for large loans on income producing
properties. It is defined as: Net Operating Income is the income from a
rental property after deducting for real estate taxes, fire insurance,
repairs, and all other operating expenses; and Debt Service is the
mortgage payment on the property. Most lenders insist that this ratio
exceed 1.15. A debt service coverage ratio of less than 1.0 would mean
that the property did not produce enough net rental income for the owner
to make the mortgage payments without supplementing the property from his
personal budget. Apply
Online
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