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Financing terms:
DEBT COVERAGE RATIO
- The relationship between net operating income (NOI) and annual debt service (ADS). Often used as an underwriting criterion for income property mortgage Loans.
- Example: Annual Debt is $10,000. The property generates $25,000 in annual gross rent, and requires $7000 for expenses of operations, leaving $18,000 net operating Income. The Debt coverage ration is 1.80 - NOI/ADS = 1.8
NET OPERATING INCOME
- Income from property or business after operating expenses have been deducted, but before deducting income taxes and financing expenses (Interest and Principal).
ANNUAL DEBT SERVICE
- Require an annual principal and interest payment for a loan. Example: A loan of $100,000 calls for 300 equal monthly payments to fully amortize the principal. Interest is 8% annually. Monthly payments are $771.82. Annual debt service is the sum of 12 monthly payments, or $9,261.84
LOAN-TO-VALUE RATIO
- The portion of the amount borrowed compared to the cost or value of the property purchased - that is, mortgage debt divided by the value of the property. Lenders are often constrained as to the maximum loan-to-value ratio on loan they originate. Example: Abel bought a $100,000 house and arranged $90,000 financing, resulting in a 90% loan-to- value ratio.
VARIABLE-RATE MORTGAGE
- A mortgage loan applied to residences, under which the Interest rate may be adjusted over the term of the loan. The amount of variation is generally governed by fluctuation of the bank of Canada and lender's prime rate.
FIXED-RATE MORTGAGE
- A loan secured by real property that feature a periodic payment of interest and principal that is constant over the term of the loan. All fixed payment mortgages are fixed rate mortgages, but some fixed rate mortgages may have variable payments such as graduated mortgage payments.
BRIDGE LOAN
- Mortgage financing between the termination of one loan and the beginning of another loan.
- Example: Johnny, who is a developer, has a construction loan outstanding. He is in the process of negotiating better terms for permanent financing than the commitment previously arranged. He has arranged a bridge loan to pay off the construction loan when it is due. When new permanent financing is arranged, that loan will pay off the bridge loan.
MORTGAGE INSURANCE PREMIUM
- The fee paid by a purchaser to obtain mortgage insurance on a mortgage loan when the down payment is below twenty percent. It protects the lender in the events of default, usually covering a portion of the amount borrowed.
MORTGAGE (LOAN) PRE-APPROVAL
- A process whereby a specific lender certifies that a prospective borrower is financially qualified and creditworthy for a specific type of loan with specified terms for an amount up to a specified maximum. Having a loan pre-approval allows a condominium buyer to negotiate with an advantage over other buyers.
