Commercial Lending Ratios, Loan to value, LTV, Debt Service Coverage Ratio, DSCR


	Commercial Lending Ratios


	Most real estate lending can be boiled down to the results of two ratios: Loan-To-Value Ratio (LTV) Debt Service Coverage Ratio (DSCR) The bulk of the energy spent "underwriting and processing" a loan is merely an attempt to verify the numbers that go into the numerator and denominator of the above 2 ratios.

	The Loan-To-Value Ratio (LTV)



	Loan-To-Value = Total loan balances (1st mtg+2nd mtg) / Property value (The lower of appraised value or purchase price). Loan-To-Value Ratios seldom exceed 75% because most lender’s always want some extra protection against a possible default.

	The Debt Service Coverage Ratio (DSCR).



	The Debt Service Coverage Ratio (also referred to as the debt coverage ratio, or DCR) is a ratio used only for loans on income producing properties. It is defined as: Debt Service Coverage Ratio = Net Operating Income / Debt Service.


		Net Operating Income

Net Operating Income is the income from a rental property after deducting for real estate taxes, fire insurance, repairs, and all other operating expenses. Debt Service is the mortgage payments 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.


	Debt to Income Ratio (DTI)



	This ratio compares the amount of personal/operating espenses the borrower (principals) must pay each month, against the amount of gross monthly income the borrower/property receives. More precisely, the ratio is defined as: DTI = Monthly Debt Obligations / Gross Monthly Income Obviously someone who’s Debt Ratio is 150% has a big problem. A Debt Ratio of 150% would mean that a borrower's obligations are one and a half times their income. Debt Ratios seldom are allowed to exceed 40% in practice. This ratio is used primarily in residential loans; it is given secondary consideration on income property loans.


		Commercial Property Types:

			Multi Family Office Retail Industrial Special Purpose


	Commercial Lending Ratios:

	Loan to Value Ratio Debt Service Coverage Ratio


	Information:

Underwriting Guidelines Financing Options Lending Document Checklist



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