Finance
In Minnesota, what is the primary purpose of a debt service coverage ratio (DSCR) in commercial lending?
ATo calculate the buyer's front-end ratio
BTo determine if a commercial property generates sufficient NOI to cover its mortgage payments✓ Correct
CTo establish the maximum LTV for residential loans
DTo calculate the cap rate for investor comparison
Explanation
DSCR = NOI / Annual Debt Service. Lenders use it to determine if the property's income is sufficient to cover the mortgage payments.
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Key Terms to Know
Loan-to-Value Ratio (LTV)
The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
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