Commercial Loan Lending Ratios

Most of real estate lending can be boiled down to the results of three ratios:

Loan-To-Value Ratio
Debt Ratio 
Commercial Debt Service Ratio (DSCR)

The Loan-To-Value Ratio (LTVR) equals the total loan balances (1st mtg+2nd mtg+3rd mtg) divided up the fair market value (as determined by appraisal). 

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 or she earns. More precisely, the Debt Ratio equals the monthly debt obligations divided up the monthly income. Obviously someone whose 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.

The final ratio used in lending 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. Debt Service Coverage Ratio equals net operating income divided by debt service. 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 1.0. 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.

 The Anatomy of a Mortgage
A mortgage payment consists of PITI
P – Principal - The original amount of the money borrowed from a lender.
I – Interest - A fee charged for borrowing money.
T – Taxes - Property taxes paid to your local government.
I – Insurance – Home owners insurance on your property.

Mortgages Choices

Fixed – Fixed mortgages have a fixed term (like 15 or 30 years) and a fixed interest rate. The interest rate and term are fixed over the course of the mortgage and your monthly payment for the payment of principal and interest will not change during the term of the mortgage. Taxes and insurance can change so this may affect your total payment during the life of your loan.

Adjustable – An ARM (Adjustable Rate Mortgage) has an interest rate that will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down based on these interest rate changes.

The Down Payment
Many people believe that they need to put down 10 percent or even 20 percent for their down payment and that’s no longer true. There are many lenders that have loan programs that require 5 percent or less, including zero down. Way back when, the only zero down loans were from the Veterans Administration but fortunately those days are gone. If you think that you have to pay rent until you save up a 10 or 20 percent down payment, check with us. You’ll be pleasantly surprised.

Prequalification
You will want to get pre-qualified during your mortgage search. Prequalification isn’t binding but rather it gives you a ballpark idea of what you can afford. The lender analyzes your income, debt and credit history to estimate your maximum loan amount. Combine that with the money you have for a down payment and you have your maximum purchase price.

The next step is preapproval which verifies your income, debt and credit. Preapproval gives you the following benefits:

• Knowing exactly what you can borrow. You will have an accurate commitment from your lender for the amount you can borrow.
• Credit problem solving. You will know now, instead of while your offer is being evaluated by the buyer if you have any credit issues to be dealt with.
• Stronger negotiating position. Sellers want preapproved buyers. They know your offer will not fall through and will consider you more seriously like the proverbial bird in the hand. This can help you negotiate a better price.