In mortgage lending, the loan-to-value ratio is used to measure the total value of a mortgage compared to the total value of the property. With a traditional mortgage, it’s possible to borrow up to the full value of your home (depending on the specific loan program), for an LTV of 100%.
With commercial real estate loans, however, lenders prefer a maximum LTV of 75% to 80%. This means you may need to put at least 20% to 25% (or more) down to be approved.
Lenders want to know that you generate enough income to handle new real estate debt. For residential mortgages, lenders look at your debt-to-income (DTI) ratio.
With commercial loans, however, lenders look at a business’s debt service coverage ratio. This measures a borrower’s ability to pay their debts based on the business cash flow. It’s calculated by dividing your annual net operating income by your total annual debt payments. The higher your DSCR, the higher your approval odds.
The median DSCR among approved commercial real estate loans was 1.25 as of 2019, according to the National Association of Realtors Commercial Lending Report. This means if you borrowed $100,000, your net operating income should be $125,000 per year.
