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Commercial Loan Underwriting
A Brief History
In the past, commercial
loan requests were
underwritten based on
the commercial lender's internal
credit policies and
guidelines. The
commercial lender, most
often a bank,
commercial mortgage bank, or
insurance company would
underwrite each
commercial mortgage loan request
on its own individual
merits. The commercial lender would
then look at their
portfolio and determine
the saturation level for
the specific property
type, delinquencies, and
other related projects
in the area and either
approve the
commercial
real estate loan request or deny
it.
Often a commercial loan
request would comply
with the commercial
lender's credit policy
but get denied because
the lender may have
reached saturation or
may currently be
experiencing a high
delinquency rate for the
subject property type.
Luckily, commercial
mortgage lending has become more
mainstream with many
other funding options
available for commercial
real estate loans.
Cash Flow
Analysis (DSCR)
The most important
component when underwriting
a
commercial loan request is the
analysis of the subject
property's cash flow.
Specifically, the
subject 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
commercial real estate
loan is called the
DSCR or DSC ratio.
Typically, commercial
lenders require a
minimum DSCR of 1.20x.
meaning, for every
dollar ($1.00) in debt
incurred, the property
must contribute one
dollar and twenty cents
($1.20) in cash flow to
support the commercial
mortgage payment.
Loan to Value (LTV)
Unlike residential
lending, commercial
real estate properties
are viewed more
conservatively.
Generally,
commercial lenders will require a
minimum of 20% of the
purchase price to be
paid by the buyer when
applying for a
commercial loan. The
remaining 80% can be in
the form of a commercial mortgage
provided by either a
bank or commercial mortgage
company. Some commercial
real estate lenders will
require more than 20%
contribution towards the
purchase from the buyer.
What a commercial 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
commercial loan
amount divided by
purchase price. If you
know what a lender's LTV
requirements are, you
can also calculate the
commercial mortgage 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
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 -
owner-occupied
commercial property - businesses less than
three years old,
personal credit of
principals will be
evaluated. For non-owner
occupied businesses, a
single entity bankruptcy
remote entity is usually
formed to take
ownership. The
guarantors must 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.
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. |
