A debt coverage ratio, also known as the debt service coverage ratio, is a popular benchmark used in the measurement of an income-producing property’s ability to produce enough revenue to cover its monthly mortgage payments. To calculate a property’s debt coverage ratio, you first need to determine the property’s net operating income. To do this you must take the property’s total income and deduct any vacancy amounts and all operating expenses. Then take the net operating income and divide it by the property’s annual debt service, which is the total amount of all interest and principal paid on all of the property’s loans throughout the year.

If a property has a debt coverage ratio of less than one, the income that property generates is not enough to cover the mortgage payments and the property’s operating expenses. A property with a debt coverage ratio of .8 only generates enough income to pay for 80 percent of the yearly debt payments. However, if a property has a debt coverage ratio of more than 1, the property does generate enough revenue to cover annual debt payments. For example, a property with a debt coverage ratio of 1.5 generates enough income to pay all of the annual debt expenses, all of the operating expenses and actually generates fifty percent more income than is required to pay these bills.

Let’s say Mr. Jones is looking at an investment property with a net operating income of $50,000 and an annual debt service of $30,000. The debt coverage ratio for this property would be 1.2 percent and Mr. Jones would know the property generates 20 percent more than is required to pay the annual mortgage payment.

If you want to purchase an income property, chances are your lender is going to require a minimum debt coverage ratio. The debt coverage ratio allows the lender to see if a property generates enough income to cover the property’s operating expenses and debt service. To a lender the higher the debt coverage ratio, the less risk there will be with the investment. Debt coverage ratio requirements vary from lender to lender with some being as low as 1.1 and others charging as much as 1.35. Most lenders will accept a debt coverage ratio of 1.2 or above.
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Article by Yon Olson, President of Accelerated Capital, Inc. - A Bend Oregon loan and mortgage company specializing in home and commercial real estate loans for all credit types. Call Yon at 541.617.0876 or visit us online for your Bend Oregon home loan or mortgage http://www.acc-cap.com/

Tags: Bend Oregon home loan, Bend Oregon mortgageBend Oregon home loan, Bend Oregon mortgage

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The time has come to buy a house. Questions buzz around in your head like a swarm of angry bees: “How much can I borrow? How much do I have to put down? How much will my payments be?” Well, let me suggest starting with the “How much can I borrow?” question.

There are many factors you need to take into consideration when purchasing a home. First and foremost, ask yourself what size monthly payment you can afford. When determining how large a mortgage you can afford, be sure to factor in all your current expenses such as car payments, credit card bills, student loans, utilities, and the like. You may also want to factor in how much you spend on things like entertainment, eating out, and traveling. You don’t want to add a mortgage payment and say goodbye to your social life. Instead, you want to make sure that you’re not overextending yourself financially so you can enjoy a good quality of life.

At the present time, most lenders will allow for a whopping debt-to-income ratio of 45% - 50%. Your debt-to-income ratio is the sum of your mortgage payment and any other credit card or loan payments, divided by your monthly gross income. Lenders use this ratio to help determine your credit worthiness. All of your revolving debts along with your mortgage payment divided by your monthly gross income should not exceed the 36% - 45% debt-to-income ratio. Here’s a quick formula to help you figure out how much you can afford to put toward your monthly house payment:

–Multiply your gross monthly income by 0.45

–Subtract your non-mortgage debt payments from the result

–What’s left is your allowable mortgage payment

So, if we have a couple with a combined monthly gross income of $5000 and they pay $700 a month toward two auto loans and one credit card, they would qualify for a monthly payment of $1550.

In case you don’t know, not all of your monthly housing payment goes toward your principal and interest. A portion must go toward homeowner’s insurance and property taxes. I mention this because on most mortgage calculators that’ll you use, you’ll need to enter these figures to get an accurate idea of what your real monthly mortgage payment will look like, and you’ll need the numbers to figure out how much of a house you can afford.

Property taxes are typically a percentage of your home’s assessed value. To calculate property taxes, local jurisdictions generally multiply the tax rate by a home’s assessed value. For example, if you pay 0.5% in property taxes of the assessed value, a home assessed at $250,000 would have a yearly property tax bill of $1,250. In order to find out the tax rate, you will need to contact your county tax assessor, or a local mortgage broker or bank may be able to assist you. As for the homeowner’s insurance, your best bet is talking to a local broker or bank to get a general idea of what it is for your area. Mortgage calculators will ask you for a percentage rate sometimes and others will ask for a yearly figure. It can be confusing for a new buyer; so don’t be afraid to seek a little assistance.

Figuring out how much you can afford to put toward your monthly house payment is a start. Now, you want to know how much house you can afford. There are mortgage calculators galore that will help you do this, but, as I mentioned above, they will require you to enter real estate taxes, homeowner’s insurance, and interest rates. Once you know how much you can comfortably spend a month toward a home, and you’ve gathered your tax and insurance rates, you only need an idea of what kind of interest rate you’ll get. You can probably kill three birds with one stone by trying to get rates for the taxes, insurance, and interest rate in one phone call. Once you have an idea of what your interest rate may be, you can plug in all your numbers on any of the numerous mortgage calculators on the internet to get a good idea of what you think you can afford.

Afterwards, if you like, you can call a local bank or broker and get pre-qualified to see if you’re numbers were in the ballpark. If your figures are similar, congratulations on a job well done. If your results are different, take the time to figure out why and don’t be afraid to ask questions. Remember, buying a house is one of the biggest financial decisions of your life. You owe it to yourself to be as thorough as you can. By taking the initiative to read this article, you’re already ahead of the learning curve. Keep up the good work, and happy house hunting.

Brian Pollard is a loan officer/marketing coordinator for Bend Mortgage Group Ltd. and mortgage company in Bend, Oregon.

Tags: Bend Oregon mortgage, mortgage company in Bend Oregon, Oregon home loan, Oregon mortgageBend Oregon mortgage, mortgage company in Bend Oregon, Oregon home loan, Oregon mortgage

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