Commercial loan underwriting guidelines come down to cash flow ( DCR), loan to value (LTV), credit worthiness and property analysis. Although the process to evaluate a potential commercial mortgage is basically the same from one bank the next, their various appetite for both risk and minimum rates of return are what separates one bank from the next.
Underwriting Commercial Loan Cash Flow
Cash flow is paramount to underwriting commercial loans. Within the industry the cashflow analysis is refereed to as the Debt Coverage Ratio ( DCR). For both owner occupied and investment transactions underwriters normally want to see ratio’s above a 1.20. In other words, for every $1 of mortgage debt the property or business has to have $1.20 of net income to meet the mortgage payments.
Debt coverage ratio minimums vary from one lender to the next, property type and occupancy (investment or owner occ). “Riskier” property types such as hotels or car washes will be required to have higher cash flow levels, ie DCR at or above 1.3.
The borrowers personal and business credit worthiness is also important and will be heavily scrutinized. Personal credit scores have become a bigger issues as the acceptance of the three bureau have become widespread. D & B’s as well as other measures are normally used to asses the creditworthiness of businesses that are involved.
Property Analysis Commercial Underwriting
Fair market rent and fair market value is heavily measured. Condition, age, appearance, town population, market trends as well as other more property type specifics are examined.
Commercial Underwriting – Loan to Value
Loan to value is simply the value of the subject property vs the loan amount. I.e if the property is worth $2,000,000 and the loan amount is $1,500,000 the LTV is 75%. This is a huge issue within commercial loan underwriting and a big separator between lending institutions. Some lenders will get very aggressive with this while other will be very conservative.
The property type has a major influence on loan to values that are offered on commercial loans. For example restaurant loans will normally be capped at 65% while more general purpose properties such as retail will be limited to 75%.
Commercial underwriters will give more leeway to buildings that are owner occupied vs. investment properties. Loan to value on purchase can go as high as 90% on owner occupants vs 75% on investments, for example.