DSCR /LTV Maximum loan

CFA Level II Alternative Investments
#1

Hi,

I found the difficulty with reasoning of the answer regarding the maximum loan calculated from DSCR /LTV. More concretely, the question on the Schweser page 33 in Book4.

It calculates the loan amount supporeted by LTV = 960,000 and that of DSCR as 900,000. Then “The maximum loan amoung is the 900,000 which is the lower of the two amounts”,

I thought the maximum is obviously 960,000, why is the DSCR one is chosen?

Thanks in advance

#2

LTV isn’t really based on the borrowers merits and ability to repay the loan. DSCR is a measure of the borrower’s ability to repay the loan. It wouldn’t make sense for the bank to finance a loan ($960,000) that the borrower can’t afford to repay. Just because I have the minimum down payment required to purchase a house for $1,000,000 does not mean I can afford it cover to mortgage payments.

#3

as a lender, I want you to satisfy both of these 2 conditions

  1. Not exceed my LTV ratio

  2. Have at least enough cash flow to cover my interest costs

so under the first condition, I can lend you up to $960,000 and up to $900,000 under the second condition

Since I require you to satisfy both conditions, I can only lend you up to $900,000 (the smaller/tighter of the 2 constrains)

#4

now i got what “maximum” means here. thanks both!