First Mortgage Constraints

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Lenders typically use two criteria to determine the amount of funds they are willing to lend to a borrower. These criteria are meant to assess the likelihood that the loan funds will be repaid and the proportion of funds the lender can expect to recover in the event of foreclosure.

Using the information you have provided, the Template calculates the maximum amount a lender would be willing to contribute under each of the lending criteria below. The amount of the first mortgage is, therefore, equal to the lowest of the two calculated numbers. The automatically calculated fields based on your first mortgage inputs include:

• Debt Service Coverage. Lenders require that borrowers have more cash flow than is necessary to service a loan. The debt coverage ratio (monthly net operating income (NOI) divided by monthly debt service) usually must be around 1.2. Given the project's NOI, the debt coverage ratio required by lenders, and the amortization period of the loan, the Template calculates the maximum amount that a lender would be willing to offer for the project's first mortgage.
  
  
• Loan to Value. Lenders compare the loan amount to the market value of the project in order to evaluate their ability to recover loaned funds in the event of foreclosure. The loan to value ratio (loan amount divided by appraised value of the project) must typically remain below 80 percent, though other financing options can also be explored. Given the lender's target loan to value ratio and the appraised value of the project, the Template calculates the maximum amount a lender would be willing to offer with regard to this constraint.