Commercial real estate loan applications are underwritten on a case-by-case basis. Every loan application is unique and evaluated on its own merits but there are a few common criteria lenders looks for in a commercial loan application package.
Debt to Income ratio (DTI) – a borrower’s personal financial health is evaluated based on the current DTI. This ratio is calculated by dividing a borrower’s monthly debts by the monthly gross income and determines how much money the borrower has available for other monthly obligations.
Debt Service Coverage Ratio (DSCR) – equals net operation income (NOI) divided by the total debt service. It is a sophisticated ratio and is more thoroughly covered in the Debt Service Coverage Ratio (DSCR) article. Most lenders require that this ratio be greater than 1.00, which is considered “break even”. Each lender may have different policies and criteria for approving commercial loans. It’s always a good idea to have those conversations with a commercial loan officer prior to spending any money on costs associated with any loan application.
Loan-to-value ratio (LTV) – Commercial lenders typically require a larger down payment for commercial loans than for personal real estate, the rationale being that the borrower will be less likely to default on the loan if a significant percentage of the purchase price is in the form of his own personal funds, or the company’s funds. The maximum LTV a lender will consider may also vary and should be discussed prior to completing any loan application.
Property Analysis – The fair market value and fair market rents (if appropriate) will be evaluated based on the lender’s analysis of an appraisal. Depending on the property involved, factors that will be evaluated may also include the age, appearance, location, local market, and accessibility. Federal, state and local requirements for permits and licensing will also be considered. Special use properties may require additional underwriting. As always, be sure to discuss the lender’s underwriting practices early in the application process.