Sunday, May 27, 2018

Commercial Lending Ratios

There are several important ratios to consider in commercial real estate lending. Among them are the

  • Loan-To-Value ratio (LTR)
  • Debt to Income ratio (DTI)
  • Debt Service Coverage Ratio (DSCR)

The loan-to-value ratio (LTV) is calculated by dividing the total of all mortgages by the purchase price or appraised value. The higher the LTV the smaller the down payment will be, but the riskier the loan will be for the lender. Lenders establish maximum LTVs to balance the needs of their customers vs. the risk exposure to the lending institution,

The debt to income ratio (DTI) equals a borrower’s total monthly debt divided by the monthly gross income. The smaller the DTI the more money the borrower has available to cover additional expenses. Lenders also establish maximum values for the DTI to minimize their risk.

The debt service coverage ratio (DSCR) equals net operation income (NOI) divided by the total debt service. It is a sophisticated ratio and is more thoroughly covered in the Debt Service Coverage Ratio (DSCR) article. Most lenders require that this ratio be greater than 1.00, which is considered “break even”.