Commercial Loan Calculator
This cool new commercial loan calculator not only computes the size of the mortgage payment on your new commercial loan, it also will compute how large of a commercial loan for which you can qualify.
How large of a commercial loan can I get? This seems like a simply enough question, but in the world of commercial finance, it can be a daunting one. Every underwriter has their own set of criteria for determining whether or not a loan scenario qualifies, but, in general, there are two and sometimes three main ratios that every lender uses.
These metrics are the Loan-to-Value Ratio, Debt Service Coverage Ratio, and on larger loans the Debt Yield Ratio. Online you can find a hundred different calculators that will calculate each one of these metrics for you, but our calculator takes it one step further. Our new commercial loan calculator determines the maximum loan size a borrower qualifies for based off all three of the main ratios. Click the link below and save this helpful calculator to your desktop.
So what makes this calculator special? Well, from an underwriters standpoint, it is always the weakest ratio that determines whether or not the deal qualifies. Think about it, would you lend someone money if they can't afford to pay it back (Debt Service Coverage Ratio) or if the collateral wasn't strong enough (Loan-to-Value)? Probably not right? Commercial underwriters are no different. It is their job to protect the lender's money.
What our calculator does is that it takes the three ratios, compares them, and bases the loan off the weakest one.
So what are these ratios. Well first lets talk about Loan-to-Value (LTV).
LTV is a term that expresses the ratio of a loan to the value of a property.
LTV = Loan Amount/Property Value
But what does it mean in plain English? Well one way to think about LTV is what you owe (or will owe) vs what something is worth. If you have a 70% LTV on your house, then that means you have loan for 70% of what your home is worth.
For example: If John Smith is buying an office building that is worth $500,000 and his loan is for $300,000, then his LTV is:
LTV = Loan Amount / Value so $300,000/$500,000 = .60 or 60%.
If John Smith has a house that is worth $200,000 and his home loan is for $130,000, then his LTV is:
LTV = Loan Amount / Value so $130,000/$200,000 = .65 or 65%
So why is metric considered a limiting factor? Lender's want to make sure there is enough equity in a property to recoup their losses in an event of foreclosure. Equity (in this case) can be thought of the difference between what something is worth vs what is or will be owed on it.
Equity = Property Value - Loan Amount
In order to ensure that their is enough equity in a property, lenders often will set LTV limits. If the LTV based off the requested loan amount exceeds these LTV limits, then the deal will not qualify for.
The second metric is the Debt Service Coverage Ratio (DSCR).
While the name Debt Service Coverage Ratio (DSCR) might seem like a mouthful, the ratio is actually pretty simple to understand. Technically, DSCR is defined as a ratio that demonstrates an entity’s ability to produce enough cash to cover its debts. Simply put, it’s a ratio that expresses what you bring in vs what you have to pay out.
The formula for DSCR is as follows:
DSCR = Net Operating Income / Debt Services (or Debt Obligations)
So you might be asking yourself, what are Net Operating Income (NOI) and Debt Services/Debt Obligations?
Well there are some long drawn explanations for what the technical definitions of NOI and Debt Services are, but for our purposes let’s keep it overly simplified. Your NOI would be income of the property (or yourself depending on the situation) and your Debt Services are your bills, including your proposed mortgage payment.
If your DSCR is at least 1.0 then that means you are making at least enough to pay your bills and make your mortgage payment. If it is less than 1.0 that means you are not making enough to cover your debts.
Let us provide some examples:
If John Smith has an NOI of $100,000, and his Debt Services total $80,000. Then his DSCR is 1.25.
DSCR = NOI / Debt Services so in this example $100,000/$80,000 = 1.25
This is good news for John, as this means his income is 125% greater than his debt obligations. But what happens if John has an NOI of $60,000 and his debt obligations are still $80,000?
Well if John Smith as an NOI of $60,000 and his Debt Services total $80,000. Then his DSCR would be 0.75.
DSCR = NOI / Debt Services so in this example $60,000/$80,000 = 0.75
Uh oh. This is not good news for John. This means that he only brings in enough cash to pay for 75% of his bills.
It is important that we talk about a property’s DSCR vs a global DSCR. Some lenders will only look at the DSCR of the property. Wait a property has a DSCR? Yes. These are commercial properties remember. The definition of a commercial property is a building or land intended to generate a profit from either capital gain or rental income.
The last and final metric is the Debt Yield Ratio.
The Debt Yield Ratio is a relatively new metric that lenders have started to adopt in the wake of the 2008 financial crisis. Prior to the crisis, many lenders were only using DSCR and LTV ratios to gauge the loan size on large transactions. But after experiencing significant losses, lenders started to realize they needed another metric to better determine their return in the event of a foreclosure. This gave rise to the Debt Yield Ratio.
The Debt Yield Ratio is typically used on large loans (over $5million) and is used to determine the cash-on-cash return on the lenders money if it foreclosed the first day after the loan was completed. It is calculated by taking the property’s NOI and dividing by the proposed loan amount.
So what does this mean in plain English? Well it means the Debt Yield Ratio represents the return the property’s income should provide in event of foreclosure. The Debt Yield Ratio formula is as follows:
Debt Yield Ratio = NOI / Loan Amount
For most lenders, a 10% Debt Yield Ratio is considered acceptable. For example:
John Smith has a high-rise apartment building that generates an NOI of $500,000. John is looking for a $5,000,000 so his Debt Yield Ratio is 0.10 or 10%.
Debt Yield Ratio = NOI / Loan Amount so for this example $500,000 / $5,000,000 = .10 or 10%