ALB Commercial Capital has a nice guide for small balance (<$5 million) apartment building investment loans. In it they cover the three most important ratios investors have to clear in order to get a deal funded:
- Loan-To-Value Ratio (LTV) = Total loan balances (1st mtg + 2nd mtg) / Fair market value (as determined by appraisal). For Multifamily mortgages, LTVs seldom exceed 80%.
- Debt Service Coverage Ratio (DSCR, aka DCR, DSR) = Net Operating Income / Debt Service. Most lenders insist that this ratio exceed 1.2 with a few a allowing 1.15.
- Personal Debt Coverage Ratio (PDCR) = Monthly Personal Debt / Monthly Personal Income. The Personal Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of income they earn. Personal Debt Ratios seldom are allowed to exceed 50% in practice.
In addition the guide covers other items that need to be addressed such as Credit Worthiness
- In many cases the personal credit of the principals will be evaluated
- Property Analysis- Fair market value and fair market rent will be analyzed. Special use properties may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.
- Tenant Analysis- A thorough analysis of the current tenants will be conducted.
- The seven pieces of information needed to initiate a loan request:
- Marketing Package or Property overview
- Copy of purchase/Sale agreement
- YTD + Two most recent year- end financial statements for property
- Background summary on tenants including rent roll and unit mix
- Borrower’s background summary or resume
- Last two years personal federal tax returns from the principal borrower(s)- including all Schedules
- Current personal financial statement of principal borrower(s) including real estate all schedules (dated and signed with original signature)
- Lending Institution fees- Various lending institutions have different fee schedules for multifamily loan applications and processing. The range of fees varies widely amongst these institutions:
- Attorney: $0-$5,000
- Appraisal: $1500- $3500
- Lenders Inspection: $250-$350
Every apartment building investment loan is treated as a one of a kind proposition and most lenders have different requirements but getting these items ready will make the loan underwriting process go as smoothly as possible.
Have you had a different experience with lender’s requirements? Or as a lender do you require other items and if so how would you advise investors on making the process go as smoothly and quickly as possible? Brokers, how do you guide your clients through this process? Thanks for your input-