Commercial Loan Underwriting Basics
Commercial Loan Underwriting Basics
I am asked on a regular basis:
“What measurements are used in determining whether or not to finance a commercial deal?”
Well, here you have it, the four values that typically carry the most weight when determining if a commercial loan can be funded or not.
Cash Flow Analysis (DSCR, or Debt Service Coverage Ratio)
A thorough analysis of the property’s cash flow is the most important component to an underwriter. Mainly, the property must have enough cash flow to cover all the property expenses plus the new loan payment. The ratio used to calculate the cash flow for a real estate loan is called the DSCR, or DSC ratio.
Most commercial lenders require a minimum DSCR of 1.20x. This means that for every dollar in debt, the property must contribute one dollar and twenty cents in cash flow to support the commercial loan payment.
Loan to Value (LTV)
Unlike residential lending, commercial real estate property lending criteria is viewed more conservatively. Typically, commercial lenders will require a minimum of 20% of the purchase price to be paid by the buyer as a down payment when applying for a commercial loan. The remaining 80% will act as the requested loan amount for the property. These figures may vary depending on a variety of factors including the type of property and creditworthiness of the company/sponsor.
Loan to value is the percentage calculation of the commercial loan amount divided by purchase price. Anything in excess of a lender’s typical LTV requirements will be required as a down payment before the loan can be closed. 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 commercial mortgage lender will use the lower of the two numbers to determine the commercial loan size.
Credit Worthiness
For commercial loans made to a business (also known as owner-occupied commercial property) and businesses less than three years old personal credit of principals (borrowers) will also need to be evaluated. The guarantors must typically have good credit and are required to provide income documentation. For stated income commercial loans, guarantors need not provide tax returns or personal financial statements. Income documentation requirements are determined on a case-by-case basis, so be sure to discuss this with your Account Executive.
Property Analysis
Fair Market Value and Fair Market Rent will be analyzed. Special use properties typically require more thorough analysis, therefore requiring additional underwriting. Many factors are considered in the analysis including: Age, appearance, local market, location, and accessibility.
Martin Hayes is a Customer Service Specialist with Principle Commercial Corporation.
For more information about commercial loans please visit http://www.PrincipleCommercial.com