Investing in Real estate usually involves Evaluations, Loans, Mortgages or Finance. Real estate professionals like Taylor Scott International, as well as banks, financial institutions, valuers etc, are using several techniques, terms and calculations before making any final decision.
I thought therefore, it would be useful and interesting to publish some of the most commonly used credit, risk and loan terms & definitions.
Definition of ‘Appraised Value’
An evaluation of a property’s value, based on a given point in time, during the mortgage origination process which is performed by a professional appraiser. The appraiser is usually chosen by the lender, but the appraisal is paid for by the borrower.
Definition of ‘Loan-To-Value Ratio – LTV Ratio’
A lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.
Calculated as:
Definition of ‘Combined Loan To Value Ratio – CLTV Ratio’
A ratio used by lenders to determine the risk of default by prospective homebuyers when more than one loan is used. In general, lenders are willing to lend at CLTV ratios of 80% and above to borrowers with a high credit rating.
Calculated as :Definition of ‘Loan-To-Cost Ratio – LTC’
A ratio used in commercial real estate construction to compare the amount of loan used to finance a project to that of the cost to build the project. If the project cost $1 million to complete and the borrower was asking for $800,000, the loan-to-cost (LTC) ratio would be 80%. The costs included in the $1 million cost figure would be land, construction materials, construction labor, professional fees, permits and so on.
Definition of ‘Total Debt Service Ratio – TDS’
A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt. More specifically, this ratio shows the proportion of gross income that is already spent on housing-related and other similar payments.
Receiving a ratio of less than 40% means that the potential borrower has an acceptable level of debt.
Calculated as :Definition of ‘Gross Debt Service Ratio – GDS’
A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment about whether a potential borrower is already in too much debt. Receiving a ratio of less than 30% means that the potential borrower has an acceptable level of debt.
Calculated as:
Definition of ‘Debt-To-Income Ratio – DTI’
A personal finance measure that compares an individual’s debt payments to the income he or she generates. This measure is important in the lending industry as it gives lenders an idea of how likely it is that the borrower will repay the loan. The higher the ratio, the more burden there is on the individual to make payments on his or her debts. If the ratio is too high, the individual will have a hard time accessing other forms of financing.
Definition of ‘Leveraged Loan’
Loans extended to companies or individuals that already have considerable amounts of debt. Lenders consider leveraged loans to carry a higher risk of default and, as a result, a leveraged loan is more costly to the borrower.
Definition of ‘Credit Rating’
An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government.
Definition of ‘Credit Risk’
This is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation.
Definition of ‘Default Risk’
The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. To mitigate the impact of default risk, lenders often charge rates of return that correspond to the debtor’s level of default risk. The higher the risk, the higher the required return, and vice versa.
In any case, any bank or financial institution will try to analyse any application for a loan or mortgage as much as possible in order to minimize the risk of a default Risk. The higher the perceived credit risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers’ overall ability to repay. This calculation includes the borrowers’ collateral assets, revenue-generating ability, etc…
The definitions listed above include some of the most important Ratios and Terms in the lending industry that investment firms , banks, financial institutions and professionals are using all over the world.
Kioleoglou Kosta Civil Engineer, REValuer (TEGOVA), Director of Engineering for Taylor Scott International
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This topic was modified 9 years, 8 months ago by Taylor Scott International. Reason: Typing mistake
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