What Do Commercial Mortgage Underwriters Look for?

What do commercial mortgage underwriters look for? The lending industry as a whole has changed quite a bit over the last five years. Commercial lending hasn’t been immune to the many changes affecting the industry. Below is a summary of what commercial lenders look for when deciding on approving a commercial mortgage loan or not.

The first thing a commercial lender will look at is the borrower. The borrower must have a good credit rating. A minimum FICO credit score of 680 is typically required. Lower scores may be acceptable on a case-by-case basis and with compensating factors. They must also have good liquidity and net worth. Minimum net worth should equal the loan amount. Minimum liquidity should equal six months worth of principal, interest, taxes and insurance. Situations where an owner is looking to pull cash out after a short period of ownership are highly scrutinized. A borrower must have vested equity in the project. 100% financing, and the like, are no longer available. Lastly, a borrower should have experience owning and managing properties similar to the property being mortgaged.

The lender will also look at the neighborhood of the property. The property should be located in an established or emerging market with a minimum population of 50,000. The area should not be undergoing any significant declines in population. Excessively rural areas will be highly scrutinized. Also the area should exhibit diverse employment and/or economic base. Finally, the property must be located near, and easily accessible to, major highways/freeways, employment sources and other demand generators.

What is the condition of the property? Lenders prefer newer construction. Older properties in good repair, or those that have undergone recent renovations, are acceptable. Commercial lenders are looking for the remaining useful life of the property to exceed the length of the amortization period. Also, the property should not require major repairs or suffer from deferred maintenance, unless satisfactory reserves are established. Of course the property should be free of any environmental hazards or risks.

A commercial lender will want to know the operating history of the property. The property should show strong operating performance with no material declines in revenue or net operating income over the past two years. The property’s occupancy should be at or above the local market’s average occupancy with no material declines over the past two years. Also, the tenant base should be diverse and creditworthy. Lastly, the property should not exhibit high vacancy rates or be subject to excessive tenant rollover in the short term.

Lenders will want to know if the property is in legal compliance. The property must conform to applicable zoning. Certificates of Occupancy must be obtained. The borrower must have all applicable licenses and permits for the intended use of the property.

While the guidelines for a commercial mortgage are stricter, there are lenders with money to lend. If you would like a quick no cost, no obligation quote, please visit SelectCommercial.com or call Stephen Sobin at 877-548-9454.

Who Are The Commercial Mortgage Lenders?

Commercial mortgage lenders have many sources of capital to choose from when placing a commercial mortgage request with a lender. Who are these lenders, and which is best for your particular needs?

Commercial Banks – Although commercial banks are still major commercial real estate lenders, the recent economic and market conditions have caused commercial banks to be much more conservative in their guidelines. Commercial banks have severely limited their geographic lending areas, cut back on loan to value ratios, and toughened up their credit criteria. In addition, commercial banks have cut back on their loan terms, preferring to keep their loan terms short – usually three to five years.

Local and Community Banks – Many local and community banks have stopped lending altogether due to the economic downturn. Those that are still lending are looking for “relationships” with their borrowers. They want to see deposits and other banking activity moved to their banks. Most do not want one-time transactions or one-time loans.

Agency Lenders – Fannie Mae and Freddie Mac are actively engaged in apartment building and multi-family lending for qualifying properties and strong borrowers. Borrowers seeking agency loans should have excellent credit, personal net worth, liquidity, and experience. The property should be in good condition with a solid rental history. Properties with high turnover, vacancy or deferred maintenance will not qualify.

Conduit Lenders – Wall Street lenders have traditionally been active with Commercial Mortgage Backed Securities (CMBS) loans. These loans, usually $3,000,000 and more, are more difficult to obtain in today’s market due to the volatility in the credit markets. Rates and underwriting requirements have been swinging wildly in this sector of the market.

Insurance Companies – Insurance companies have always provided low rate and long term loans on commercial real estate. These loans are underwritten conservatively (low loan to value ratios) and are offered on strong properties and to strong borrowers. Insurance company rates do not fluctuate with each and every move in the market as these loans are tied to the company’s internal cost of funds.

Credit Unions – Many credit unions are beginning to aggressively lend on commercial real estate. These lenders typically like deals close to home and like to establish relationships (they like deposits). They most often compete with the local and community banks in the area. These lenders weren’t very active in the past and don’t usually have any bad loans on their books at this time.

Private Lenders – Due to the uncertainties in the market, private lenders have stepped in to create access to capital for those borrowers unable to obtain conventional financing. These loans are usually short term and at rates considerably higher than conventional rates. These loans require less underwriting time and usually close within 30 days. Private lenders are more concerned with property value and potential cash flow than with borrower credit issues.

There is a lot of uncertainty and volatility in today’s lending market. The days of walking into your local bank and obtaining the loan you need (and that is best for you) are long gone. A good commercial mortgage broker who understands your needs and has access to all of the lenders described above is a necessity to get the best commercial mortgage rates and terms. He will be able to guide you through this process and help you obtain a commercial mortgage that meets your needs.

If we can help you, please visit www.selectcommercial.com or call Stephen Sobin at 516-596-8537.