Commercial Mortgage Lenders Key Terms

Understand the key terms related to commercial loans
By Shannon Tani Commercial mortgage lenders must have a thorough knowledge of all of the terms associated with the industry in order to do their job properly. For example, they need to know how to determine the LTV of a property or the debt ratio of the applicant. They should also be able to explain these complex terms to potential borrowers in a way that's easy to understand. This ensures that there is no confusion throughout the loan process.

Loan to value (LTV) ratio

A mortgage lender determines the LTV ratio by dividing the total amount of a mortgage by the value of the property, then multiplies by 100 to get a percentage. The LTV is lower when the borrower pays a higher down payment. For example, if a borrower pays a $40,000 deposit on a $200,000 home, the LTV is 80%.
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Debt ratio

The debt ratio is a way for lenders to determine whether a borrower can afford mortgage payments. To determine the debt ratio of a business, a commercial mortgage lender would determine what percentage of a business' income is used to pay debt. All lenders have a maximum debt ratio that they will allow, including the mortgage payments, usually 36 percent to 42%.
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Debt service coverage ratio (DSCR)

Similar to a debt ratio, the DSCR measures the amount of a mortgage against how much income the property can generate. This is what lenders will use when the property itself is the business investment.
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Fixed-rate and adjustable-rate mortgages (ARM)

In a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan. In an adjustable-rate mortgage, the rate changes after a certain period of time. ARMs typically have a low interest rate to begin with, but may surprise borrowers with a large jump in payment when it changes.
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Balloon mortgage

In a balloon mortgage, the company pays a fixed rate for a short period of time, such as five years. At the end of this period, the remaining balance of the mortgage is due. This is attractive to business owners that may not have enough money to pay a traditional fixed rate mortgage when they are just starting.
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Non-recourse

Many commercial mortgages are non-recourse loans, which means that if the borrower defaults, the lender can repossess the property- but has no ability to recoup losses if the property has decreased in value.
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