Loan Underwriting Analysis
This calculates the income property loan underwriting analysis. Enter the remaining economic life in years. Enter the current interest rate for comparable treasury bonds (e.g., 10-year life and 10-year bonds). Enter the gross operating income. Enter the operating expenses.
Please do not use percentage or dollar characters or commas in the calculator.
ExampleYou are evaluating a prospective investment. The property has a useful life of 33 years. Treasury bonds currently yield 4.3%. You estimate the gross operating income at $463,002. The expenses are $199,690. How much can you borrow? The loan constant is 0.0731473, and you can borrow $2,460,401. Sophisticated AnalysisThis is a more sophisticated version of the break-even analysis. In actual practice, to determine what loan constant to use, you take 75% of the remaining economic life of the property to set the term. Then take 125% of the interest rate offered by comparable length Treasury bonds to set the interest rate. For underwriting purposes, a lender will most likely take 82% of operating expenses that include a reserve for replacements. The 82% of the gross operating income, the 75% of the remaining economic life, and the 125% of the Treasury bond rate may be subject to small variations. The operating expenses for different types of properties vary greatly. The calculator does all these calculations for you automatically once you enter the inputs. This formula will work for a broad range of properties with little alteration. To make this analysis work effectively, however, the economic life must be estimated accurately (i.e., by a compentent income property appraiser). Lenders who don't use this analysis may find their loan portfolios less secure than those of their competitors who follow this formula. Underwriting Analysis Formula: ((Gross Operating Income x 82%) – Operating Expenses) ÷ Annual Loan Constant Loan Constant CalculationLoan Constant Formula (for use with a financial calculator):
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