Underwriting Commercial Properties

Before a Buyer finances a commercial property the commercial properties have to be underwritten by the lender which is done after the mortgage loan application is filled out. During the review of your mortgage package, lenders will consider a variety of mortgage underwriting guidelines they have in place for the commercial property you are purchasing. The more a buyer understands what these guidelines are, the more they can improve their chances for financing pre-approval or approval.  In addition to owner occupancy and loan to value ratios here are six areas lenders look at.  They are commonly known as the 5C’s not including number 2 below:

1. Collateral
2. Amount and source of down-payment and reserves
3. Capacity (you monthly income)
4. Credit history
5. Personal characterisitics
6. Compensating factors

The 5 C’s for underwriting commercial properties

Collateral- every lender has standards about which commercial property they will accept as collateral against a loan.  Some lenders will not finance properties above 4 units (residential).  Some will not touch poor condition properties or in bad neighborhoods. Several lenders will want to make sure the property is properly serviced by all utilities along with zoning conformance, paved roads etc.. Before a Buyer makes an offer they should understand the underwriting guidelines of the respective lender for commercial properties.

Source of down-payment: Regardless of the LTV many lenders want to see their borrowers put some skin in the game. Most of the time they will ask you , where are you getting the cash to put the money down on the property?  Best sources are your own savings, using a credit card towards a down-payment is not a good idea and should be avoided.  Also lenders will look at your cash that will be on hand for reserves to cover two to three months of subsequent mortgage payments.

Capacity- Defined as your monthly income and your ability to make your mortgage payment.  This evaluation is done by looking at the borrower’s monthly income from employment and other sources as well as the expected income (less expenses)from the property you are financing. If you are a buyer -owner , the lender will scrutinize “qualifying ratios”. A qualifying ratio is a specific amount of your income that can be tagged to make your mortgage payments.

Credit History- Good credit expands your possibilities, you become a desirable customer for the lender.  If you have had bad or poor credit, it doesn’t mean you cannot get financed however, your credit should be cleaned up for a period of at least 18 to 24 months and show you are firmly in control of your financial status.

Characteristics: Education level, Career potential, Job stability, Previous experience with commercial properties, Saving, spending, and borrowing habits, Dependability and Dress along with mannerisms.

There is a process of acquiring commercial properties and step 1 is the financing that has to be established, of course if you are paying cash that changes the dynamics quite a bit.