Commercial Underwriting Guidelines
Commercial Financing is underwritten on a case by case basis. Every loan application is
unique and evaluated on its own merits, but there are a few common criteria lenders look
for in commercial loan packages.
Financial Anaylsis
A key component in making an underwriting evaluation is the debt coverage ratio. The DCR
is defined as the monthly debt compared to the net monthly income of the investment
property in question. Using a DCR of 1:1.10 a lender is saying that they are looking for a
$1.10 in net income for each $1.00 mortgage payment. Typically they will determine the DCR
ratio based on monthly figures, the monthly mortgage payment compared to the monthly net
income. The higher the DCR ratio the more conservative the lender. Most lenders will never
go below a 1:1 ratio ( a dollar of debt payment per dollar of income generated). Anything
less then a 1:1 ratio will result in a negative cash flow situation raising the risk of
the
loan for the lender. DCR's are set by property type and what a lender perceives the risk
to be. Today, apartment properties are considered to be the least risky category of
investment lending. As such, lenders are more inclined to use smaller
DCR's when evaluating a loan request. Make sure that you are familiar with a lender's DCR
policy prior to spending money on an application. Ask them to give you a preliminary
review of the investment property that you want to purchase.
Information is free, mistakes are not.
Loan to Value
Unlike residential lending, commercial investment properties are viewed more
conservatively. Most lenders will require a minimum of 20% of the purchase price to be
paid by the buyer. The remaining 80% can be in the form of a mortgage
provided by either bank or mortgage company. Some commercial mortgage lenders will require
more than 20% contribution towards the purchase from the buyer. What a bank/lender will do
is subject to their appetite and the quality of the buyer and the property. Loan to value
is the percentage calculation of the loan amount divided by purchase price. If you know
what a lender's LTV requirements are, you can also calculate the loan amount by
multiplying the purchase price by the LTV percentage. Keep in mind that the purchase price
must also be supported by an appraisal. In the event that the appraisal shows a value less
then the purchase price, the lender will use the lower of the two numbers to determine
the loan that will be made.
Credit Worthiness
For businesses less than three years old, personal credit of principals will be evaluated.
This may hold true for longer periods of time for tightly held companies. For
corporations, business performance and credit ratings will be evaluated with a proven
track record.
Property Analysis
Fair Market Value and Fair Market Rent will be analyzed. Special use property may require
additional underwriting. Age, appearance, local market, location, and accessibility are
some other factors considered. |
Commercial Loans
Underwriting Guidelines
Commercial Mortgage Ratios
Commercial LTV Ratio
Commercial Debt Ratios
Commercial Debt Service Ratio
Commercial Property Types
Questions to Ask Yourself
10 Myths and Facts About SBA
Commercial Loan Checklist
Financing Options |
