Commercial Loans Blog

What Are Commercial Lending Ratios?

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

• Debt Service Coverage Ratio (DSCR)
• Loan-To-Value Ratio
• Debt Ratio

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. Give us a call at 866-400-8630 or email to info@100FG.com.

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. Please call us at 866-400-8630 for the DSCR for your property.

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 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 80% because the lender always want some extra protection against default. Give us a call at 866-400-8630 or email to info@100FG.com.