Commercial Loan Underwriting Guideless: What Professionals Evaluate

Commercial loan underwriting guidelines are more detailed, in-depth and restrictive than for a home mortgage loan. Understanding what professionals evaluate can help you prepare to apply for a business loan on commercial property.

Commercial Loan Basics

When you are evaluated for a residential loan, the underwriter looks at your personal finances, in particular your credit history and debt-to-income ratio. If it falls within standard limits, you'll be approved.

Commercial loan underwriting guidelines go beyond that. Not only is the business' financial health examined, the personal finances of top management can be reviewed and the creditworthiness of the property being purchased will be examined.

Financial Analysis

The first thing a commercial loan underwriter will review is the Debt Coverage Ratio (DCR) of the business property under consideration. This is a comparison between the monthly income of the property and the monthly debt payment on it.

Commercial loan underwriting guidelines will derail a commercial loan if the DCR is too low. If the ratio is less than 1:1, that means the property has negative cash flow, and it will not be considered for a loan.

Loan-to-Value Ratio

Commercial loan underwriting guidelines call for a minimum 80 percent loan-to-value ratio on a business property. That means a loan will be considered for no more than 80 percent of the property's current market value. It also means the borrower will need to have 20 percent equity in the property. If the equity is borrowed from another source, you can expect to pay higher interest rates.

This is more restrictive than mortgage loans, where lenders will lend up to 100 percent of home's value, in some cases, but require the borrower to get Private Mortgage Insurance.

Credit History and Standing

Commercial loan guidelines call for a review of the business' profitability and credit history, in other words, its ability to pay the loan if the business property, for some reason, doesn't pay for itself.

If your business is less than three years old, you can expect the lender to do a full credit review of the personal finances of the firm's leading executives.

Evaluation of the Property

Beyond the Debt Coverage Ratio of the property, commercial loan underwriting includes an evaluation of the current market value of the property. This takes into account the property's age, location and condition.

If the purchase price for the business is above its current market value, it will be difficult for income from the business to cover that loan.

Evaluation of Tenants

Finally, commercial loan underwriting guidelines call for an evaluation of tenants in the commercial property under consideration. Underwriters will look at the historic occupancy rate for the property and surrounding properties. They will examine leases in place. In some cases, expect underwriters to verify the financial stability of tenants, particularly if you are counting on raising lease rates to get an adequate Debt Coverage Ratio.