Basic Information On Commercial Mortgage Loans

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Understanding The Ratios That Are Applied When Evaluating A Commercial Loan Request

Lenders employ the use of calculators and ratios to determine if you will receive your loan. The following examples should help you to understand the process.

The Debt Service Coverage Ratio

First determine what the Net Operating Income (NOI) is by using this formula:

Next, calculate the Mortgage Debt Service (MDS) by totaling up payments for interest and retirement of the mortgage loan on an annual basis.

Now divide the NOI by the MDS and you will have the DSC ratio.

N O I ÷ M D S = D S C Ratio

Loan-to-Value Ratio

The Loan-to-Value Ratio (LTV) is simply the total of all your loan balances divided by the Fair Market Value (FMV) (see Appraisal section).

Total Loan Balances (first, second, etc) ÷ F M V = L T V
350,000 + 75,000 ÷ 600,000 = 70.8 %

Now, considering that a lender is looking for a 75% LTV or less, the example above, if a real one, would make your position with the lender a very favorable one.

Note: In some cases they will accept a higher percentages so inquire with a lender what criteria would allow for a higher percentage rate .

Debt-to-Income Ratio

Although a lender's DIC is a required bit of information a lender will be putting more emphasis on the property's DIC and will want for it to be a self-sufficient enterprise. By comparing the total monthly debt service of the borrower to his gross monthly income you can arrive at his DIC.

Monthly Obligations ÷ Gross Monthly Income = Debt to Income Ratio
4,500 ÷ 10,000 = 45%

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