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Investing in real estate can be one of the best investments available today. If you are starting your own investment property business you invariably be shopping for an investment property mortgage. While most people have a good understanding of their own personal mortgages, there are differences when you are shopping for a mortgage for investment property. While it is not difficult to obtain an investment property mortgage, these loans do come with some extra challenges.
| Part of doing your own homework, prior to approaching a lender, is to understand that there are three common ratios which all commercial lenders use to judge the risk of any investment. By becoming educated about these ratios, you can come to the mortgage funding table with your lender in a better position because you are better prepared. Your preparation will make them more likely to do business with you than if you had not been prepared. |
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The first consideration your lender will want to look at is the loan-to-value ratio (LTV). The LTV is the same as you might associate with residential lending. It is simply the total debt on the property in comparison with the property’s current market value. If you own a home which has a current market value at $200,000 and a mortgage of $160,000, then your LTV would be 80%.
While residential lenders are okay with lending at 80% LTV or higher, most commercial lenders use a standard of 75% LTV as the least they will generally lend on.
The second consideration will be your project’s debt coverage ratio (DCR). The DCR tells the lender how much income the property is producing when compared with the cost of the total debt on the property. The DCR is calculated by taking your net operating income and dividing it by the total of all of the mortgage debt on the property.
Most lenders require a DCR of at least 1.2 in order to mortgage on an investment property. A DCR below 1.2 indicates to the lender that the property is probably not going to be profitable.
The third consideration will be your own debt ratio. If you own a small company you will be required to submit a personal financial statement as a guarantee on the potential loan. This debt ratio will be your own personal monthly housing expenses divided by your own personal monthly gross income. Your debt ratio shows the lender how you manage your personal finances and if you can afford to guarantee the investment property mortgage. Most commercial lenders will not lend to you if your personal debt ratio is above 25%.
While commercial and residential loans are essentially the same, they have separate factors used to determine your eligibility to close on the loan. If you take a bit of time to learn these other factors which commercial lenders take into account, you will be well on you way to obtaining your first property investment mortgage.
| More Information: Bad Credit Refinancing — Nearly everyone goes through a bad time financially at some point in their lives. Unfortunately this time can sometimes coincide with the need to obtain a mortgage or refinance an existing mortgage. Finding a good mortgage is still possible even with bad credit. Generally bad credit mortgage refinancing is easier than trying to find a lender for a primary mortgage. |
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