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Commercial Real Estate Loan Resources

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The 3 C's of Commercial Real Estate Loans (continued)

The underwriting process places great importance upon a commercial appraisal when assessing the collateral for the commercial real estate loan. A commercial appraisal utilizes three variables to derive the commercial real estate's value, income approach replacement cost, and sales comparison method.

 

Heavy emphasis is placed on the income approach valuation method. Other key factors a commercial lender will review in the appraisal are: property's age, area market capitalization rate, comparable properties, vacancy rates, and the general overall condition of the property.

 

2.  Property's Cash Flow
The cash flow derived from the gross rents of a property is one of the most important factors commercial lenders use when approving or denying a commercial mortgage loan request. An underwriter will review the historic income generated from the property, with a focus on the most recent 90 days. The annual net operating income of the property should cover the annual principal and interest payments of the new loan by a minimum of 1.25. This ratio is know as the debt service coverage ratio.

 

3.  Borrower/Guarantor Credit
Credit can be defined as the combined personal credit of the borrowers/guarantors. If a corporation, partnership, Trust, REIT, or other non-natural person is the borrower, than the credit of the entity will be considered as well, although to a lesser degree.

 

Credit requirements differ by lender, but the following are industry standard minimum personal credit requirements for a commercial loan:

 

  • 660 minimum credit score
  • No personal bankruptcy in the past 7 years
  • No foreclosures, short sales or loans with a principal forgiveness within the past 3 years
  • No open tax liens or judgments

 

The 3 C's of Commercial Lending are the basis for underwriting a commercial loan request.  Commercial mortgage loan requests that meet these basic requirements create the foundation for a successful approval.

 

But keep in mind, this doesn't necessarily mean that a borrower that meets these requirements is automatically approved for a commercial mortgage loan. But rest assured, not meeting any one of the 3 C's of credit will surely end in denial of your loan request.

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