The 5 Factors That Can Make or Break Commercial Mortgage Approvals

By: Zack North

It’s no secret that borrowers often struggle to work with traditional lenders when trying to secure commercial mortgage approvals. The usual difficulties are made exponentially greater when the real estate in question falls outside their guidelines.


But what borrowers may not know is that there are alternative lending options that provide the flexibility to overcome hurdles with their property. These types of lenders also have guidelines and program restrictions, but they are more likely to identify mitigating factors that make funding a commercial loan possible — even when a bank says no.


Along with the general qualities lenders consider when reviewing a deal, such as credit score and liquidity, alternative lenders also analyze a commercial property’s population/marketability, property type, loan purpose, valuation, and the borrower’s own history.


Factors That Make or Break Commercial Mortgage Approvals

Let’s take a look at each of these additional factors to learn how a lender like Commercial Direct finds value in commercial properties that may not be obvious to other more restrictive lenders.


1. Population/Marketability

Lenders generally won’t lend in rural, unpopulated areas with few comparable properties. But a non-bank alternative like Commercial Direct can lend in secondary and tertiary markets and will look for qualities that offset obstacles while building the case for an approval.


If a borrower’s financing request involves a secluded piece of commercial real estate, conduct a search of the surrounding areas. If the property is located near enough to a metropolitan area, an alternative lender could use that proximity as evidence of its marketability and approve the deal despite the property’s immediate surroundings.


If the real estate has been bought and sold several times in the past few years, a non-bank lender could also use the number of transactions as evidence of the property’s marketability – even if it’s located in a secluded area.


2. Property Type

Commercial lenders typically designate a list of eligible properties on which they will lend. While traditional lenders are unlikely to budge when it comes to their requirements, borrowers may be able to partner with a non-bank lender on a property type that falls just outside their box – provided the borrower can prove the deal’s strength in other ways.


First – borrowers should be up front about the property. Today’s lenders have skilled underwriting teams who can quickly tell if, say, a multifamily property is actually a motel in disguise. Borrowers have a better chance of getting their loan funded if they clearly describe the property and give some evidence of its value – even if it’s technically on the lender’s ineligible list.


They should then do some research into the lender’s programs to see where their flexibility lies. For example, Commercial Direct only transacts on multifamily properties with 5 or more units, but brokers can take advantage of its ability to close deals involving duplexes, triplexes, and 4-plexes – provided the total number of units is 5 or greater. In this scenario, the three duplexes can effectively be referred to as a six-unit commercial multifamily building.


With a little homework, borrowers can learn which lenders actually can transact on their property type and stop wasting precious time trying to sway those that don’t. At the same time, they should keep in mind that non-bank lenders can offer additional solutions that expand their program.


3. Loan Purpose

It isn’t unusual for small-balance borrowers to have a need for postponing necessary repairs while they manage their commercial property. What complicates matters is the fact that lenders have differing limits on the “cost to cure” deferred maintenance items. If borrowers aren’t sure whether or not they are in a position to secure funding from a particular lender, they should clearly communicate the situation to their representative and learn as much as you can about the lender’s underwriting process. They may be able to determine the deal’s likeliness to close without going through a lengthy appraisal process.


Commercial real estate properties can also be approved or denied based on whether the transaction is a purchase or refinance. A non-traditional lender can look at previous transactions and the property’s marketability to make the deal work.


4. Valuation

One of the main reasons small-balance deals are denied is because the lender determines that the borrower has overvalued their property during the submission process. Again, this is a common occurrence – the difference is that a non-traditional lender is more likely to work with borrowers to find evidence of a property’s stated value.


The first step to overcoming valuation hurdles is to understand what a lender looks for as they arrive at a pre-screen value estimation. Lenders will likely conduct an income analysis and review any available sale data, as well as any comparable data the borrower provides. Of course, there are also factors a lender won’t consider during its internal valuation, such as dated sale data, income generated apart from the property, or comparable data from non-commercial or ineligible property types.


The important thing to remember is that non-bank lenders want to provide a solution for their borrowers and are willing to be creative when evaluating the factors that determine a property’s value.


5. The Borrower

At the end of the day, the factor that makes or breaks most small-balance commercial transactions is the strength of the borrower. If a business owner or investor has a strong credit score, operates a successful business, and is able to provide all necessary documentation, they will be able to take their pick when it comes to lender partners.


On the other hand, a borrower with very poor credit and an unprofitable business can easily prevent a commercial deal from closing – even if the property in question has no issues whatsoever.


Of course, those who require small commercial mortgages are most likely going to fall somewhere in between the two extremes. Consider the self-employed professional whose tax returns fail to prove the success of her business, or the entrepreneur whose credit report is marred by a bankruptcy he experienced 5 years ago. These borrowers may be credit-worthy, but they’re going to have a difficult time securing financing from their bank.


In these types of situations, an alternative lender like Commercial Direct can provide solutions that make the most sense. Their reduced documentation programs are a great fit for borrowers who can’t produce tax returns, and their team has the experience needed to help borrowers who have been ignored by banks and other types of traditional lenders.


If borrowers understand how alternative lenders evaluate seemingly non-bankable commercial real estate, they can quickly find a solution that meets their needs.

Author: Zack North

Zack North is the Director of Marketing for Commercial Direct.  As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.

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