When applying for commercial loan, there are many people who are often confused with the requirements. You have to know that for each application for such loan, it is independently evaluated with no 2 applications being similar. Commercial lenders take a look at each individually and judge them according to their merits. There are several common threads that they will evaluate in every application on the other hand. Here are some of the basic commercial loan underwriting guidelines to which you have to be mindful about.
Among the biggest criteria that commercial lender will take a look at is LVT or the Loan to Ratio value of the loan. They want to be certain that the LVT of a certain property meets their specific requirements. To give you an example, say that they are using an LVT of 80 percent, this means they are only giving you an 80 percent loan of the property’s value. So, if the property is amounting to one million dollars, then they will just give you 800,000 dollars for the loan. You’ll have to come up with the remaining 200,000 on your own and of course don’t forget about the closing costs and due diligence.
And say that your proposal fail to meet their LVT ratio, then they’ll demand some changes. They are usually strict on LVT and because of that, you must meet their criteria or, you have to provide some sort of incentive like equity in the deal.
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During your underwriting process for commercial loan, the lender is going to look at your financial projections and statements. They will see to it that all the figures make sense for proposed loan. And one thing you ought to know is they will closely look at DSCR or Debt Service Coverage Ratio or referred commonly as DCR.
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DCR deals with debt of property and the recurring mortgage payments than the income. They want to know that the income from the property is capable of covering the mortgage payment each month along with margin remaining. Lenders also prefer commercial properties that are self sufficient and with that, their DSCR will reflect this need. As an example, if they have DSCR ratio of 1:2, what it means is that for each dollar of mortgage you are making, you must have 2 dollars of revenue.
With traditional commercial loans, the lenders normally want to see at least 3 years of successful history of your business. If you don’t have enough proof to show, then they are going to evaluate your personal credit history.