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Underwriting
Guidelines
Commercial
Lending Ratios
Commercial
LTV Ratio
Commercial
Debt Ratios
Questions
to Ask Yourself
Commercial Loan
Checklist
Commercial Financing
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Commercial LTV
Ratio
The loan-to-value
(LTV) ratio is probably the most
important of the 3 underwriting
ratios.
The loan-to-value ratio
is defined as:
LTV Ratio = Total Loan
Balances (1st mtg+2nd
mtg +3rd mtg) / Fair
Market Value of the
Property
First let's look at
the numerator. If the
borrower is only applying
for a first mortgage,
and there will be no
other loans on the
property, then the
beginning balance of
the new loan requested
should be inserted
in the numerator.
However, if the borrower
is applying for a second mortgage,
then the "underwriter" (the
person who determines
whether or not the
loan qualifies) should
insert the sum of the
first and second mortgages in
the numerator. Similarly,
if the borrower is
applying for a third
mortgage, then the
underwriter should
insert the sum of the
first, second and third
mortgages into the
numerator.
When the borrower is
applying for a second
or third mortgage,
the loan-to-value ratio
is often known as the
combined loan-to-value
ratio (CLTV ratio).
Now let's look at the
denominator. Generally
the fair market value
of a property is determined
by an appraisal. There
is one important exception,
however. When the proceeds
of a mortgage loan
are used to buy the
same property that
is securing the loan,
then that mortgage is
known as a "purchase
money loan." If the
appraisal comes in
lower than the purchase
price in a "purchase
money" transaction,
then the lender will
use the LOWER of the
purchase price or appraisal.
Mortgage brokers
are often asked by
real estate agents
and buyers to base
their loan on the appraised
value rather than the
purchase price. Their
claim is that they
have negotiated a super
deal and that the property
is worth much more
than what they are
paying for it. This
may be so (although
generally untrue),
but lenders always
base their maximum
loan on the lower of
purchase price or appraisal.
The lender's argument
(its their money, so
there is really very
little argument) is
that an appraisal is
really no more than
an estimate of fair
market value, no matter
how competent or conscientious
the appraiser may be.
The only true indicator
of value is the marketplace
in which "a willing
buyer and a willing
seller, each in full
knowledge of the salient
facts, and neither
under undue pressure,
agree upon terms." If
the property sells
for "X," then it is
probably only worth "X." |
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Appraisal
To Establish Home Market Price
In the real world, very few individuals
order appraisal reports to establish
an offering price or to substantiate
a purchase price. At the point that
an offer to purchase (in a typical
residential transaction) is made, the
price has been set by other parties,
not the purchaser. The price has been
determined by the seller, who wishes
to obtain the highest price possible,
or the agent, who receives a percentage
of the price as compensation and often
represents the seller in the transaction.
The real estate agent
will typically perform
a comparative market
analysis (CMA). The
appraisal laws in most
states allow real estate
agents to perform CMAs
without an appraiser's
license or certification.
A CMA is a necessary
part of the agent's
preparation for a listing
and consists of examining
sales of properties
in the area to arrive
at a listing price.
The reliability of
the CMA depends upon
the agent's experience
and the characteristics
of the property. The
agent will suggest
a selling price to
the seller based upon
the analysis. However,
neither the seller
nor the agent are bound
by the results of the
analysis, and the agent
is not required to
follow any formal procedure
in completing the CMA.
If a seller wishes
to list the property
at a price higher than
the price suggested
by the agent, then
the agent may be forced
to accept the listing
at that price or risk
losing a commission.
Purchasers believe
that they are getting
a good deal if they
make an offer lower
than the listed price.
But how far above the
market value was the
property listed? 10%,
15%, maybe even 20%
above the fair market
value? A negotiated
price of 10% less than
the listed price on
a property that was
listed at 20% above
its value is not a
bargain. The agent
cannot tell the purchaser
that the offered price
is higher than the
value, or even higher
than their own CMA.
In most states, they
must submit the offer
to the seller.
The seller of a property
may want to order an
appraisal before listing
the property. Of course,
the cost of the appraisal
is always a deterrent,
especially if the seller
knows that a buyer
will pay for it when
applying for a loan.
But the appraisal is
often justified. The
seller could lose a
sale if the property
appraised for less
than the sale price
when appraised by the
appraiser. |
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