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
Analysis
A key component in making an underwriting evaluation is
referred to as 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 typical lender is saying that they are
looking for a $1.10 in net income for each $1.00 mortgage
payment. Typically the lender 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.
