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Commercial Underwriting Guidelines
The one thing you could say about the commercial underwriting business
is, it is fair. Each particular loan is examined strictly on its own merits.
Armed with financial statements, ratios, credit reports, appraisals and
inspections and viability studies, lenders examine each and every request
for funding on an individual basis. The Fair Market Value and, if it is
any type of housing, the expected rents will be appraised, too. If you
are expecting revenues that are not realistic, and do not conform to the
Fair Market Rents in your area, and you have applied those assumptions
to your expected income figures, you will be denied.
Ratios, Ratios and Even More Ratios
Although they are not the only thing underwriters look at, ratios play
a major factor in commercial loan application acceptance and refusal.
The DCR, LTV and DIR (see the section on Basic Commercial Mortgage Information)
will all have sway to one degree or another when the final decisions are
made regarding any request for commercial funding.
The DCR, Debt (Service) Coverage Ratio, is a major player in its own
right. If this ratio alone, is off, a lender will start to shy away from
funding your project. If the commercial property in question is not self-sustaining,
and appears to not be able to produce more revenue than expenses, chances
are it will be denied funding. The biggest concern for underwriters is
your future ability to satisfy the mortgage agreement and not default
and go into receivership.
The Specific Type of Commercial Property Being Assessed Is Also Pertinent
to the Situation. Some types of properties are more appealing than others
to a lender. Housing complexes or apartment buildings are two such commercial
properties. Because of the demand for housing, and the steady stream of
income that it produces, rental units are seen as very good investments.
As long as a property is located in a decent area, has been well maintained
or will be built to the latest standards, getting the proper financing
should not be a problem as long as the down payment conforms to the acceptable
The Loan-to-Value Ratio has a lot more bearing on a commercial loan application
than a conventional residential application. Commercial loans tend to
be for much higher amounts, much more is therefore at risk, and lenders/underwriters
are considerably more cautious. Prospective buyers are advised to find
out exactly what the criteria for down payment is, as well as the desired
DCR, before paying to have an application reviewed for acceptance. Find
out exactly what the lender is looking for so that you can get off on
the right foot when you do step into the application process. If all things
are as they should be, and your property, your credit and your ratios
all conform, you will still need to put down twenty percent, or more,
of the property's value. Lenders will also be looking at the appraisal
price, versus the purchase price, and if the appraisal figure comes in
lower, that is all you will be offered in funding.
Take a look at our Credit Matters article in the Home Loan Section of
our site. The criteria listed there for credit worthiness applies here
also, and then some. You will need to be able to provide all your personal
data if yours is a fledgling company, and a track record of at least three
years running has yet to be established. If it is a company or corporation
that is seeking funds from a commercial lender then the stability and
profiles of such will be investigated, too.