With collateral to
offer Commercial loans can be taken out by any business or
non-profit organization. Real estate is typically the collateral
put up in order to secure a loan, so the more you have and the
higher its value, the more you can borrow. There are a number of
different potential sources for commercial loans, and you may want
to be aware of all of them in order to make a knowledgeable
decision about the institution to which you want to be indebted
Commercial banks remain one of the biggest lenders to the
commercial sector. The process of applying for a loan from a
commercial bank is straightforward and similar to applying for a
personal loan. You can choose any common loan structure like fixed
rate, adjustable, or balloon, and you will have to give the bank
proof of your business's assets to obtain the loan.
Commercial Underwriting Guidelines
Every loan application is unique and evaluated on its own merits,
but there are a few common criteria lenders look for in commercial
Financial Analysis: - A key component in making an underwriting
evaluation is the debt coverage ratio. The DCR is defined as the
monthly debt compared to the net monthly income of the investment
property in question. Make sure that you are familiar with a
lender's DCR policy prior to spending money on an application. Ask
them to give you a preliminary review of the investment property
that you want to purchase. Information is free, mistakes are not.
Unlike residential lending, commercial investment properties are
viewed more conservatively. Most lenders will require a minimum of
20% of the purchase price to be paid by the buyer. The remaining
80% can be in the form of a mortgage provided by either bank or
Most of real estate lending can be boiled down to the results of
• Loan-To-Value Ratio
• Debt Ratio
• Debt Service Coverage Ratio (DSCR)
The bulk of the energy spent "processing" a loan is merely an
attempt to verify the numbers that go into the numerator and
denominator of the above 3 ratios.
The Loan-To-Value Ratio (LTVR) is defined as follows:
Loan-To-Value= Total loan balances (1st mtg+2nd mtg+3rd mtg) /
Fair market value (as determined by appraisal).
Loan-To-Value Ratios seldom exceed 80% because the lender always
wants some extra protection against default.
The second ratio that lenders use when underwriting a loan is the
Debt Ratio. The Debt Ratio compares the amount of bills that the
borrower must pay each month to the amount of monthly income he
earns. More precisely, the Debt Ratio is defined as:
Debt Ratio = Monthly Debt Obligations / Monthly Income
Obviously someone whose Debt Ratio is 150% is in trouble. A Debt
Ratio of 150% would mean that a borrower's obligations are one and
a half times his income. Debt Ratios seldom are allowed to exceed
40% in practice.
The final ratio used in lending is the Debt Service Coverage Ratio
(DSCR). The Debt Service Coverage Ratio is a sophisticated ratio
only used for large loans on income producing properties. It is
Debt Service Coverage Ratio = Net Operating Income / Debt Service
Net Operating Income is the income from a rental property after
deducting for real estate taxes, fire insurance, repairs, and all
other operating expenses; and Debt Service is the mortgage payment
on the property.