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Will I Qualify for a Commercial Real Estate Loan?

Due to the Great Recession, banks are much tougher when they underwrite commercial loans these days.  Will you qualify?  It all depends on the three C's of underwriting - credit, capacity to repay, and collateral.  Let's look at credit first.

Commercial banks are the lenders who are making most of the commercial loans today, and banks require good credit.  You will usually need a credit score of at least 680, and a credit score of over 700 is greatly preferred.  Now if your credit score is lower than 680, please don't panic.  We recently convinced a bank to approve a commercial loan for a veterinarian with a foreclosure on his record (due to a divorce) and a credit score of just 630.  And even if a bank won't do your particular deal, there are still scores of hard money commercial mortgage companies willing to make subprime commercial loans.

When a bank underwrites a commercial borrower's capacity to repay, the bank looks primarily to the cash flow of the property.  The commercial property's net operating income (NOI) must exceed the proposed commercial mortgage payment by at least 25% to 45%.  In the parlance of the commercial financing industry, the debt service coverage ratio must exceed 1.25 to 1.45.  Conduit lenders also require that the debt yield ratio (a brand new underwriting ratio) exceed 9.0% to 10.0%.

Commercial lenders are also demanding more collateral today.  In 2006 and early 2007, commercial lenders would regularly approve commercial loans of 75% loan-to-value.  Many commercial lenders even made commercial loans put to 80% loan-to-value!  Then commercial real estate plummeted by 45%, and commercial lenders got hammered.  They took enormous losses.  As a result, most commercial lenders cut their loan-to-values back from 75% all down to 58% to 65%.  This remains the case today.  Does this mean that it is impossible to get a deal approved by a bank at higher than 65% loan-to-value.  No, there are still some lenders who will consider higher LTV's, but the deal will have to be very, very strong.  You are more likely to qualify for a commercial loan at higher than 65% loan-to-value if the deal is a purchase money deal (in other words, you're buying the property).  Another way to get high LTV deals approved is if the borrower has lots of liquid assets, like cash in the bank and marketable securities.® is sponsored by C-Loans, Inc. — For more information, contact Alicia Gandy
4811 Chippendale Drive, Suite 101, Sacramento, CA 95841 telephone: (916) 338-3232 * Fax: (916) 338-2328
Real Estate Broker -- California Department of Real Estate -- License Number 01330173
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