Which of the following is an example of a loan covenant?

A loan covenant refers to specific conditions or terms included in a loan agreement that borrowers must adhere to in order to maintain the loan in good standing. These covenants are designed to protect the interests of lenders by ensuring that borrowers maintain certain financial metrics or behaviors throughout the life of the loan.

The correct choice highlights examples of financial ratios and thresholds that borrowers must meet, such as Debt Service Coverage Ratio (DSCR) minimums and Loan-to-Value (LTV) limits. DSCR is a measure of a borrower’s ability to cover debt obligations based on their cash flow, and maintaining a minimum DSCR indicates that the borrower has enough earnings to cover their debt payments. Similarly, LTV limits help lenders assess the risk associated with the loan by ensuring that the amount borrowed does not exceed a certain percentage of the property’s value, supporting the likelihood of loan repayment even if property values fluctuate.

In contrast, while variable interest rates and minimum credit score requirements are important aspects of loan agreements, they do not define specific performance measures that borrowers are obligated to maintain throughout the term of the loan. A prepayment penalty, although a feature of loans, is not a performance covenant but rather a provision that penalizes borrowers for paying off the loan early. Thus,