Lenders look at many factors in determining whether to approve or reject an investment property loan. Underwriters will investigate the personal qualifications of the borrower as well as the fundamentals of the subject property. Some of these factors include:
An applicant should have a good credit rating. Typically lenders will expect to see a credit score of 680 or better. A lower credit score may be acceptable if the balance of the application is strong. In addition, an applicant needs to show adequate net worth and cash liquidity. Underwriters want to see that the applicant has sufficient cash reserves to handle sudden and temporary setbacks such as vacancies or the need to make improvements. Further, an applicant must have equity invested in the transaction. Lenders are no longer interested in making investment property loans no little or no down payment. Ideally, the applicant should have adequate experience owning and/or managing similar investment properties.
The property should be located in an urban or suburban location with a minimum population of 50,000 people. Properties in very rural locations are very difficult to finance and are highly scrutinized. The area should exhibit a diverse employment or economic base. Rural areas with only one employer (such as a military base) are often difficult to finance.
The subject property should be in good condition and in good repair without the need for major capital improvements. Investment properties that are in need of repair will require that the borrower establish adequate cash reserves in escrow to cover all needed repairs. The property should not pose any environmental or safety risks.
The investment property should exhibit a stable and profitable operating history. Operating income and net profit should be stable and increasing and show positive trends. High vacancies and expiring leases are “red flags” to lenders, and if any of these exist, they should be clearly explained upfront. Lenders do not want to lend on an investment property that does not or will not be able to cover the operating expenses and the mortgage payment.
An investment property should conform to all applicable zoning requirements, have a valid certificate of occupancy (if necessary) and maintain all necessary licenses and permits for the intended use of the property. The title will need to clear and, in most cases, a valid survey will need to be obtained.
You can find more information on commercial mortgage loans here.