Commercial Mortgage Loans
Consumer Information on Commercial Loans
A commercial mortgage loan is often taken out from a lender, when a business or an individual is considering purchasing investment real estate. These loans are treated differently to those required for a residential property. The underwriting process in different for each loan application; each one treated as unique and dealt with on a case by case basis. There are, however, a few common factors that lenders look for when processing a commercial loan, whether it be online or not.
Firstly, lenders will make a financial analysis of the investment property to be financed. A debt cover ratio (DCR), the monthly debt compared to the monthly income is evaluated. Lenders need to ensure that the income from the business is greater than the monthly mortgage payment. For example, a lender will look for $1.10 monthly net income for every $1.00 mortgage payment. Lenders rarely consider anything less than a 1:1 (a dollar for a dollar) ratio as the business would be in danger of a negative cash flow, eventually leading to the non-payment of the mortgage.
There are investment properties for which lenders will use a smaller debt cover ratio as they are deemed to carry less risk. Apartment properties are just one of these investments; however, it is advisable to check the lenders debt cover ratio before spending any money on an application. It would be worthwhile asking a lender to do a preliminary review before diving in and applying for a loan.
Most lenders require the borrower to make a down payment of 20 percent minimum of the purchase price. The remaining amount can be borrowed from the bank or mortgage lender. A percentage calculation, known as Loan to Value (LTV), is used to determine what the lender will offer. Dividing the loan amount by the purchase price produces the Loan to Value figure. Therefore an appraisal of the investment will be required to support the purchase price. The lender will use the lowest amount (appraisal or actual purchase price) when deciding on the amount to offer.
Of course, no lender would consider offering a loan without carrying out a full credit check. Businesses that are less than three years old will rely on personal credit of principles to be evaluated. And for corporations, performance and credit ratings will be checked.
Finally, investment property that is being used for special use will be subject to additional underwriting. Factors such as age, location, appearance, the local market and accessibility will be considered.