What is a loan-to-value ratio (or LTV)?
The LTV is very important in determining the amount of capital that can be obtained to finance a given property. LTV relates the principle portion of a mortgage to the appraised value of a property. This LTV is very similar to colonial discounting as it serves to protect the lender's debt stake in the property.
LTV = Amount of Loan / Value of Property
The lender will determine an LTV value based on factors such a financial history of the business, credit scores, length of loan, etc. After which, the lender will multiply the LTV by the appraised property value to determine the maximum loan amount that can be given to a borrower.
Amount of Loan = Value of Property * LTV
Clearly, without other considerations the borrower benefits from a higher LTV ratio.
What is Debt Service Coverage Rate (or DSCR)?
The DSCR approaches the mortgage picture from an entirely different angle than the LTV. Where the LTV determines the loan amount based on the value of the property, the DSCR bases upon the cash flow of the property and / or borrower.
DSCR = Debt Service / Cash flow
The debt service is usually taken as an annual figure that includes both repayment of principle and interest payments for a given year. Cash flow is calculated by taking adding noncash expenses back to net income such as depreciation.
Once again, the lender will use factors such as business credit, industry risk, etc. to call a figure for DSCR. Usually this will be around 1.20. After which, the total debt service is calculated and a total loan amount derived from it.
Debt Service = Cash Flow * DSCR
Without other considerations the borrower can benefit from a lower DSCR ratio, but remember a borrower will usually feel the pain of an under calculated DSCR (Not being able to pay the monthly mortgage!) Before that of an LTV.
Source by Michael Anders