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. |
A key component in making
an underwriting evaluation is the debt coverage
ratio (DCR). 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 is 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. |
Unlike residential lending,
commercial investment properties are viewed
more conservatively. Most lenders will require
a minimum of 25% (sometimes 20%) of the
purchase price to be paid by the buyer.
The remaining 75% can be in the form of
a mortgage provided by either a bank or
mortgage company. Some commercial mortgage
lenders will require more than 25% 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. |
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. |
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. |