Every lender is unique, but most begin the loan qualification process in a similar fashion. Put simply, lenders must be satisfied with the property, the borrower, and the borrower’s business before they approve a loan request.
Wondering what a lender is going to look for as they analyze your loan request? This quick rundown should give you the information you need to feel more confident about this aspect of the commercial loan application process.
Factor Number One: The Property
One of the primary differences between residential and commercial loans is the fact that commercial underwriters spend much more time qualifying the property in question. This is because commercial properties – even those in the same category, like office, or warehouse, — share few characteristics. Instead of reviewing comps in the same neighborhood, commercial underwriters must carry out a more thorough approval process.
The property’s location is an important aspect of this review process. Most lenders are less likely to finance properties in exceedingly rural areas. A typical lender will also have a list of states where they don’t lend – meaning a prospective borrower will be out of luck regardless of their loan request’s attractiveness.
The property type in question is another important aspect of the review process. A lender will first check to make sure the building falls within their list of eligible property types. While lenders regularly finance multifamily, retail, office, and other standard commercial property types, fewer are willing to lend on special use properties like ice skating rinks or golf courses.
To learn about the property-related information we review, see our post on the 3 commercial mortgage documents you need to apply with Commercial Direct.
Factor Number Two: The Borrower
While the property type in question is significantly more important in the commercial loan qualification process, the prospective borrower plays an important role as well.
Commercial lenders must learn about the borrower’s credit history and financial situation before they decide whether or not to provide financing. Here are a few of the factors a typical lender will consider:
- Cash liquidity
- Income (capacity)
- Net worth
- Other capital and assets
The more flexible lenders understand that there are many different types of credit-worthy borrowers. They create special loan programs for those who can’t produce certain documentation and work to provide other solutions that more closely match a borrower’s specific needs.
Factor Number Three: The Business
Finally, lenders will need to feel confident about the property’s ability to generate revenue. For instance, if the property in question is a multifamily building, the lender will review the current occupancy and operating statements to judge whether or not the borrower will able to keep the property tenanted throughout the life of the loan.
Once lenders have the initial information they need, they can calculate the property’s Debt Service Coverage Ratio (DSCR). This metric is calculated using the derived property Net Operating Income (NOI = the net income after expenses derived for the benefit of the property owner prior to paying any mortgage debt associated with the property) divided by the debt service expense (principal and interest payment). The target ratio varies by lender, but with smaller loans the ratio is usually expected to be a minimum of 1.20. This means that the property would be required to earn a net $1.20 for every $1.00 of debt payment based on principal and interest only.
Not sure what some of these commercial mortgage terms really mean? Then head over to our Knowledge Base and beef up your knowledge by running through our glossary of important commercial loan terms.
Do you feel like a strong fit for a Commercial Direct loan?
Commercial Direct specializes in providing attractive loan solutions to borrowers who struggle to qualify for conservative bank programs.
If you feel confident that your loan request is ready to be reviewed by a flexible lender like us, then be sure to visit our Loan Customizer today. You’ll be able to design the exact loan to meet your specific needs.
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.