First Mortgage Characteristics

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This portion of the Development Pro-Forma tab requires that you describe the characteristics of your first mortgage.

In a typical financing plan, the first mortgage helps take out the construction loan and also provides funds for getting a project prepared to open-for-business. In this section of the Template, you will enter details about the loan agreement. The Template will automatically calculate the actual amount of the loan for you. The input fields include:

• Minimum Debt Service Coverage, which is the ratio is used by lenders to assess a project's ability to honor their monthly mortgage payments. The debt service coverage ratio is the project's net operating income (NOI) divided by the amount of debt service payments. To lessen the risk of default, lenders typically look for debt service coverage ratios of approximately 1.20. Enter the minimum debt service coverage ratio required by your first mortgage lender as a percentage.
  
  Note that the debt service coverage constraint is calculated using the NOI from Year 2 of operations. Because the rent-up period occurs during Year 1, the Year 1 NOI may not represent stabilized property income.
  
  
• Maximum Loan to Value, which is the ratio is used by lenders to 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 is calculated by dividing the loan amount by the appraised value of the project. An acceptable private lender loan to value ratio is usually below 80 percent. Enter the maximum loan to value percentage required by your lender.
  
  Note that in some cases, lenders will be willing to accept a relatively higher loan to value ratio (80 percent or higher), but will often charge a higher interest rate to compensate for the increased risk of making the loan.
  
  
• Points, which are up-front interest costs paid to the lender in exchange for a lower interest rate. Each point usually equals one percent of the loan principal. Enter the percentage by which you plan to lower your interest rate through the payment of points on your first mortgage. Once you have completed the Financing Sources tab, the cost of points for the first and second mortgages will be shown on the Gap Analysis tab and help to determine the amount of total financing needed for the project.
  
  
• Interest Rate, which is the yearly rate at which the loan accrues interest. Enter the interest rate for the first mortgage.
  
  
• Loan Term, as used by the Template, serves as both the term and amortization period for the first mortgage. "Term" refers to the number of years the project will make principal and interest payments on the loan. "Amortization Period" refers to the time it takes to retire a debt through equal periodic payments. Many loans have terms and amortization periods of 15, 20, 25, or 30 years. Although the loan term is entered in years, the Template calculates interest assuming a series of monthly payments.
  
  On the Operating Pro-Forma tab, this information will be used to calculate the monthly principal and interest payments. If the property is sold before the end of the loan term, the Template assumes the property will pay off the first mortgage in the year of the project sale.
  
  If your project's first mortgage financing will involve a more complex or irregular schedule of payments, create a custom loan on the Custom Loans tab, instead, and leave all inputs related to the first mortgage at zero.
  
  
• First Mortgage Source, which identifies the private or public lender that will provide the first mortgage. In some cases, the HOME Program or another Federal, State, or local program will be the first mortgage source.