How Commercial Lending Ratios Affect Your Loan

Commercial Lending Ratios 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.

We Close More Commercial Loan than Anyone. Give me a call today to get your loan closed at 866-400-8630.

The Debt Service Coverage Ratio (DSCR) is a sophisticated ratio used for income producing properties and businesses/franchises. 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.

We Close More Commercial Loan than Anyone. Give me a call today to get your loan closed at 866-400-8630.

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. Debt Ratios seldom are allowed to exceed 36 to 40% in practice.

The final ratio used in lending is 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). Loan-To-Value Ratios seldom exceed 75% to 80% because the lender always want some extra protection against default.

We Close More Commercial Loan than Anyone. Give me a call today to get your loan closed at 866-400-8630 or 512-650-8630.

 

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Here’s A Little Bit About Me. 20+ years in the finance industry, I rose to the level of Assistant V.P. with Chase Manhattan. While working for Chase, I decided that I wanted to have residual income without having to quit my job. I bought my first apartment building in 1996, three days before my wedding. In 2001, I decided I would leave the corporate world and work for myself in a net branch environment. My passions are helping people get commercial mortgage loans. I also am passionate about investing, working out and being with my family and friends.