Commercial Loan Underwriting Guidelines

Commercial loan underwriting guidelines are a topic that remains a mystery for many people. If you are planning on buying a piece of commercial property, there are certain guidelines that you need to be aware of. First, each commercial loan application is going to be evaluated differently. No two applications are alike. Therefore, lenders are going to look at each one individually and judge it on its own merit. However, there are a few common threads that they will look at for every loan application. Here are a few of the basic commercial loan underwriting guidelines that you need to be aware of. 

Loan to Value Ratio

One of the biggest criteria that a commercial lender will look at is the loan to value ratio of the loan. They will want to know that the loan to value ratio on the property is in line with their particular requirements. For example, let's say that they use a loan to value ratio of 80%. This means that they are only willing to loan you 80% of the value of the property. If the property is $100,000, they are only going to give you $80,000 for the loan. You are going to have to come up with $20,000 on your own. If your proposal does not fit into their loan to value ratios, they are going to need to make some changes. They are usually very strict on loan to value ratio and therefore, you will have to meet their criteria. 

Financial Analysis

During the commercial loan underwriting process, they are going to want to look at your financial statements and projections. They will make sure that all of the numbers make sense for the proposed loan. One thing in this area that they will look at closely is the debt coverage ratio. The debt coverage ratio deals with the debt of the property compared to the income. They want to see that the property will be able to cover the debt payment each month and then some. They like commercial properties to be self-sufficient, or be able to get by without help from other influences. Therefore, their debt coverage ratio will usually reflect this need. For example, if they have a debt coverage ratio of 1:2, this means that for every dollar of debt they allow you, they want to see two dollars coming back in from the outside. 

Business History

Most of the time, commercial lenders are going to require that you have at least three years of successful business history to be evaluated. They like to see that your business idea can be successful before they put their money into it. If you do not have enough business history to properly evaluate, it may fall back on your personal credit history. They will look at your personal assets and they may require a personal guarantee to grant you the loan that you need. 

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