How to Get Your Loan Past the Loan Committee, and Get It Approved

Commercial mortgage lenders look at hundreds of loan applications each month. How can you make sure yours stands out? Many borrowers try to get a loan without first investigating what a lender might want to see on his application before approving the loan. These days, lenders are especially cautious because of the financial regulation environment, and of course, the elephant in the room, heavy losses from the recent recession.

What lenders look for

There are three things that the the lender looks for in general when evaluating loan scenarios. The first is credit. This can also be looked at as character. How is your credit? Are all your bills paid on time? And more importantly are all your bills related to real estate paid on time? One of the easiest ways to kill a deal is to have a late payment on a mortgage of any sort on your credit or on your business’s credit report. As long as you manage your real estate debts relatively well, factors such as credit cards, installment loans, car loans, and student loans may play a less critical role.

The next thing that lenders evaluate is income. In the case of commercial real estate, this refers to the income of the building. Does the building have positive cash flow, or a path to cashflow? Of course it does, otherwise you would not be buying it. However lenders want to see cash flow above what the debt service and expenses would be. They want to see that you are able to service the debt, pay your expenses, and make a profit. In industry jargon, they look at what is called a debt service coverage ratio (DSCR). This is the amount of income the property makes after expenses over the mortgage payment per month. In most cases a DSCR of 1.25 will usually work. The lender wants to see that you are making a profit so that if any hardships should arise, there is a cushion of income to ensure that you’re always be able to at least pay the mortgage. The lender will also feel more comfortable when they know that there is free cash flow from the property that does not have to be immediately spent on expenses and other costs. Additionally, there are one time expenses that come up over the course of owning a property that you need to set aside a contingency for. Having a healthy slice of profit left over after expenses in debt service allows you to put money away to handle those one-time non-recurring expenses.

The third thing that lenders look at are assets. The lender wants to see that you have the financial wherewithal to weather any possible storm that could come up, such as the financial crash we recently saw. Typically, lenders look for what are called reserves. Reserves are the number of months you could service the debt with absolutely no income coming in. For example, if the mortgage payment was $1000 a month and the lender required that you have six months of reserves, you would need to have $6000 in assets after the transaction is completed. Lenders also look for how much money do you have available to you. If the lender has to foreclose on the property. If the loan is a full recourse loan, if the property is foreclosed, if the bar is responsible for any difference between the money being recovered from the sale of the property and the total debt owed, or if they sell the property for less than what is owed, then the buyer would have to cover the rest of the loan. The bank lender wants to see that the bar has enough to cover that.

The numbers

Now let’s get down to brass tacks. What are the numbers in real terms that lenders are looking for? Lenders are looking for transactions where the loan to value is between 65% and 75% the total value of the property. In the case of multi-family properties, this range will be closer to 75% and all others will be closer to 65%. While there are no hard and fast rules on this, these guidelines are pretty much in line with what’s happening in today’s lending environment.

Let’s talk about assets. Lenders want to see that you have between 25 to 50% of the loan balance in assets or in your net worth. They typically also want to see at least six months in reserves. The last piece of the puzzle is the sponsor. That is the borrower. That is you. Lenders prefer borrowers who’ll have some meaningful experience in their field of endeavor. For example, if you are buying an office building, owning single-family homes may not be a meaningful enough experience for a lender to feel comfortable. If you don’t have sufficient experience if what you are trying to do, It may help to work with a partner that has more experience. We can never underestimate the importance of the sponsor. Strong sponsors are able to secure loans easier than weaker ones, and understandably so. The lenders know that someone with experience has weathered a few storms in the past and is likely to be in the game longer. Therefore, they’ll be able to handle what may come up in the future.

Ready to get your loan application started?

If you’re ready to begin the mortgage application process, please contact us to schedule a complimentary consultation to answer any questions that you may have and to learn more about the timeline and costs of obtaining financing.

Aurum & Sharpe is a full-service commercial mortgage brokerage and we can get you the financing you need.

Mortgage Rates

Calculate Your Monthly Payment