expectation of receiving a waiver for higher leverage. Inside of this guideline there are levels, or tiers, of pre-review restrictions. In a Tier 3 pre-review market, lenders are delegated up to 65% LTV. In a Tier 4 Pre-review market, Fannie Mae lenders are delegated up to 55%. Waivers in Tier 4 pre-review markets are not likely; however, solid deals have a healthy chance of receiving the requested waiver in Tier 3 markets. This re-review designation is typically the result of a market presenting limited and/or dominant economic drivers (i.e., military, oil and gas, etc.). You will also find that max leverage is often reduced to 75% in smaller markets. Even if multiple industries are represented, limited population and market size is a concern. As mentioned, in a buyers’ market where cap rates are higher, debt service is typically not an issue. This leverage-constrained approach is used to define the loan amount, meaning leverage was capped or “constrained” by the maximum LTV allowable by the lender. As cap rates compress and interest rates rise, the underwritten net operating income will not support the same leverage as it once could. Both cap rate and debt service coverage ratio utilize NOI as a constant. So, if the NOI remains the same, and the DSCR stays the same, the resulting loan amount will, of course, stay the same. Using this same NOI figure, a compressed cap rate will increase the purchase price, resulting in lower LTV. An increased rate environment exacerbates the proceeds issue in that the NOI will support a lower loan amount, further reducing the LTV. PROCEEDS-DRIVEN METHOD. In the current market, it is common to underwrite deals using a
income. How they view your reassessed taxes and budgeted variable expenses will sway your loan amount as well. APPROACHES FOR DETERMINING LOAN AMOUNT The property-level and market-level variables impacting your loan amount are centered around one of the two core approaches lenders will use to determine your loan amount. You will find that lenders use the lesser of either a leverage-constrained approach or a proceeds-driven approach to determine your proceeds. LEVERAGE-CONSTRAINED METHOD. This is the most commonly used approach to determine your loan amount. This is the maximum loan to value a lender will allow. This approach has historically been acceptable due to the low interest rate environment and reasonable pricing that allows a property to service the proposed debt at or above the minimum required Debt Service Coverage Ratio (DSCR). Industry standard leverage is 75% to 80% loan to value in the multifamily
space. In the past, meeting or exceeding the minimum DSCR
requirements has not been an issue. In fact, in many cases, some property improvement funds have been able to be included in the permanent loan due to excess cash flow. Although a maximum leverage of 80% has come to be expected, there are certain scenarios where maximum leverage is reduced. Fannie Mae has outlined specific markets where their lenders only have delegated authority to fund up to 65% LTV. These are referred to as pre-review markets because if that lender wants to fund a loan amount above 65% LTV, they need to send the request in to Fannie Mae to “pre-review the deal, with the
or down. Most permanent lenders in the investment real estate space do not lock in the rate until shortly before closing. The best case is when they honor the rate range from the time of application. Even in that scenario, however, other property-level variables will reduce your loan amount. In some scenarios, it makes sense to purchase an Early Rate Lock (ERL). This usually makes sense only on larger, institutional-sized transactions. The appraiser’s final budgeted expense figures will be a huge driver in the underwritten
INVESTOR REVIEW :: 3
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