What Lenders Look for When Reviewing Your Commercial Loan Request

By: Zack North

Knowledge is power – especially when it comes to your commercial loan request. If you’re seeking financing for a commercial property, like an apartment building, office, or retail center, you may be wondering just what lenders are doing while your request is “under review.”

Of course, every commercial lender is different.  But most will issue their approval or denial based on some combination of the following metrics.

This information isn’t just for your peace of mind.  By reviewing these metrics now, you may be able to tweak your request so that it has a better chance of getting approved.

 

  • Your credit history

 

They say that residential underwriting focuses on the borrower while commercial underwriting focuses on the property’s ability to generate income.

But the truth is that your credit history is also an important factor.

It doesn’t matter whether it’s for personal loans or commercial loans, when lenders pull your credit report, they look for two things:

  • The credit score itself.  Lenders will have a minimum score they can accept – this score varies across the lending spectrum.  As an example, Commercial Direct, a division of Silver Hill Funding, LLC, has a minimum FICO score requirement of 650.
  • Any negative financial events in the past.  If you’ve experienced a bankruptcy within the past few years, you may find it very difficult to work with traditional lenders.

If you’re interested in improving your current credit score, you can get our list of helpful tactics here.

 

  • Your business and personal financials

 

A lender needs to feel comfortable about your ability to repay their loan.  To get comfortable, they will likely review your personal and business’ financials, as well as a business plan that indicates future success.

The documentation under review here depends on the type of loan you apply for and the lender you choose.

Traditional lenders (like banks) will want to see tax returns and other documentation so they can get a clearer picture of the capital available to you.  The problem is that many borrowers are either not willing or not able to accommodate lenders’ requests.

The good news is that lenders do create alternative solutions those who fail to meet traditional documentation requirements.  These are typically referred to as “reduced doc” or “light doc” loan programs.

 

  • The commercial property in question

 

When lenders review a commercial property, they focus on the building itself, the location, and its ability to generate income.

In most cases, a lender will use a third party appraiser to help determine the value of a commercial property.  The process generally takes several weeks to complete.

Location is also important.  Your financing request could get denied at this point if:

  • Your property is located in a state where a lender does not do business
  • The property is located in an unpopulated or rural area, or
  • The building requires significant repairs.

One more note on property valuation.  The commercial real estate industry typically uses one of 3 approaches to arrive at an estimated value:

  • Sales Comparison Approach: Arriving at a valuation by reviewing the recent purchase price of comparable properties in the area.
  • Income Approach: Taking the rental income a property generates and dividing that figure by the property’s cap rate.
  • Cost Approach: Determining a property’s value by reviewing recent land sales nearby.

 

  • Your loan request

 

This may seem obvious, but it’s worth mentioning here.  Your specific request – the loan amount, term length, and any other specification, will have much to do with a lender’s approval decision.

Generally, the more a lender knows about your loan request, the better able they are to accommodate your needs.

If you’re looking to refinance, a lender will want to know if you hope to access some of the property’s equity or if you simply want to lock in a lower interest rate.

If you’re shopping for a short-term loan, a lender may ask how to plan to repay the loan and what you will do with the property once the loan matures.  This is often referred to as an exit strategy.

This is where flexibility enters the picture.  If traditional lenders balk when you share your specific set of needs, you may need to expand your search and reach out to alternative lender options.

While these lenders offer higher interest rates, they are also better equipped to meet needs having to do with transaction speed, documentation flexibility, and cash-out amount.

If you’re ready to apply for financing with Commercial Direct, you can quickly get started here.  Just leave some basic information regarding your loan request and one of our commercial loan officers will be in touch with helpful next step information.

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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