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.