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Four Key Financial Ratios

In Commercial mortgages four key financial ratios are very important for decision making which are as under:

  • Debt service coverage ratio (DSCR)

Debt Service Coverage ratio is sophisticated financial ratio which shows if the property generates enough net rental income to make mortgage payments.

DSCR = NOI / Debt Service

This is for rental income properties and net operating income is the net income after deducting real estate taxes, insurance, repair and maintenance and all other operating expenses; and debt service is the mortgage payment on the property. Lenders prefer to see this ratio exceeding 1.0. If this ratio is less than 1.0, then it means it does not produce enough to meet its mortgage payments.

  • Loan-To-Value-Ratio (LTVR)

This loan to value ratio tells us if the lender is forced to foreclose, then whether lender will be able to sell the property for more than what it is owed?

Loan-To-Value = LTVR = Total Loan Balances (1st Mtg+2nd Mtg + 3rd Mtg) / Fair Property Market Value as determined by Appraisal

LTVR seldom exceeds 80% as lender likes extra protection.

  • Net-worth-to-loan-size ratio

This ratio is the combined net worth of the owners/ principals behind at least as large as the loan amount?

Debt Ratio = Combined Net Worth of All the Borrowers / Loan Amount

Typically banks require this ratio to minimum of 1.5.

  • Loan-to-cost ratio (LTC)

This ratio often used in construction loans. , This ratio makes sure that developer contributing enough of his own money to ensure that he won’t just disappear when problems inevitably arises?

Loan-To-Cost Ratio = LTC = Total Loan Amount / Total Project Costs

Generally lenders don’t go more than 85% of LTC e.g. in purchase or newer properties.

 

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