Shopping for Loans Part I. You come across a triplex that you think would make a

Question

Shopping for Loans Part I. You come across a triplex that you think would make a great rental property. The appraiser hired by the bank determines the market value of the property is $680,000; however, due to your negotiation skills and a highly motivated seller you sign a contract to purchase the property for just $600,000. Your banker approves you as a borrower and notes that the bank recently increased its loan-to-value constraint from 75% to 80%. The bank also does not employ a debt service coverage ratio constraint. Q3(a). What is the maximum loan you can obtain based solely on the loan-to-value constraint? Show your work. Q3(b). Your lender reports that the loan committee approved a maximum loan amount of $480,000. What other constraint must be at work here? Based on the information provided, what specific parameters is the bank following regarding that constraint? Explain your reasoning and show your work.

Explanation / Answer

Maximum Loan Available = 80% of Value of Property = 6.8Lacs * 80% = 5.44 Lacs

Here if the bank has approved a loan of 4.8 Lacs, it means that the bank is following the following norm= "Loan Amount = (Lower of ( Valuation or Actual Price )) * Loan to Value

Here the Actual price was 6 Lacs, so the bank took lower of the two, that is 6.8 Lacs vs 6 Lacs, i.e. it got 6 Lacs* 80% = 4.8 Lacs.

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