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Commercial Mortgage Lending
At Lifestyle-Mortgage.com, we know Commercial mortgage lending in Alabama, North Carolina, Mississippi, Tennessee and Missouri. Our goal is to assist each of our Commercial Loan clients in making good sound financial planning decisions with the financing of your commercial property.
We offer programs with:
Regardless of whether your Commercial Property is located in Alabama, Mississippi, North Carolina, Missouri or Tennessee, our Commercial Loan Specialists have been helping local businesses finance their commercial properties with exceptional rates and easy repayment terms. No matter whether your financing an office building in Nashville, TN or an industrial park on the outskirts of Kansas City, MO, Lifestyle-Mortgage.com professionals can make it hassle-free.
For more information about our Commercial Mortgage Lending programs, please feel free to contact us or use our fast and easy Quick Apply application!Lifestyle-Mortgage.com
Small Business Mortgage Product:
We at Lifestyle-Mortgage.com will work exceptionally hard on your behalf to facilitate the approval and funding of your commercial loan; please be sure you understand the minimum requirements and risks.
Questions to Ask Yourself
Please share all of your honest answers to these questions with us so that we can best assist you with your commercial loan. For more information, just send over a Quick Apply application!
Commercial Financing is underwritten on a case by case basis. Every loan application is unique and evaluated on its own merits, but there are a few common criteria we look for in commercial loan packages no matter whether the loan is in Hattiesburg, MS, Charlotte, NC, or in any of the other metros where we provide commercial loans.
A key component in making an underwriting evaluation of a commercial property in Murfreesboro, TN or in any of the other cities where we make commercial loans 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. Using a DCR of 1:1.10 we are basically saying we're looking for a $1.10 in net income for each $1.00 in mortgage payment. This ratio will vary according to borrower and property type. Typically we will determine the DCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income. The higher the DCR ratio the more conservative we will be.
With a commercial loan, we will never go below a 1:1 ratio (a dollar of debt payment per dollar of income generated) without a significant borrower cash investment due to the extensive risk that such a ratio creates. Anything less then a 1:1 ratio will result in a negative cash flow situation for the commercial property in question. DCR's are set by property type and what we believe the risk to be. As of today, apartment properties are considered to be the least risky category of investment lending. As such, we are more inclined to use smaller DCR's when evaluating this type of loan request.
Loan to Value
Unlike residential lending, commercial investment properties are viewed more conservatively. We will typically require a minimum of 20% of the purchase price to be paid by the buyer and, in some instances, more. The amount of down payment/your investment is subject to the quality of your financial picture and the commercial property itself. Loan- to-value is the percentage calculation of the loan amount divided by purchase price of the commercial property to be financed. Knowing what our LTV requirements are, you can calculate the loan amount by multiplying the purchase price by the LTV percentage. Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less then the purchase price, the lender will use the lower of the two numbers to determine the amount of the loan that will be made.
For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations with a proven track record, business performance and credit ratings will be evaluated.
Fair Market Value and Fair Market Rent will be analyzed for the specific commercial property type. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors lenders consider in evaluating commercial property loans in Decatur, AL and in the other cities where we originate such loans.
The bulk of the time spent "processing" your commercial loan is merely an attempt by the lender to verify the numbers that go into the numerator and denominator of the 3 ratios lenders use when making underwriting decisions.
The Loan-To-Value Ratio (LTVR) is defined as follows:
Loan-To-Value Ratios are seldom allowed that exceed 80%, but in rare instances exceptions can and will be made dependent upon DCR.
The second ratio lenders use when underwriting a loan
is the Debt Ratio. The Debt Ratio compares the amount of bills you must
pay each month to the amount of monthly income you earn. More precisely,
the Debt Ratio is defined as:
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 lenders use 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 defined as:
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. Most lenders typically require this ratio exceed 1.0. A debt service coverage ratio of less than 1.0 would mean that the property did not produce enough net rental income for the owner to make the mortgage payments without supplementing the property from his personal budget. Let Lifestyle-Mortgage.com help your through the Commercial Loan Underwriting Process! Don't wait, give us a call or use our fast and easy Quick Apply application!
When analyzing the personal budget of a borrower, lenders use two different debt ratios to determine if the borrower can afford his obligations. These two debt ratios are:
The "top" debt ratio is defined as:
By "monthly housing expense" lenders mean either the borrower's monthly rent payments, or if she owns her own home, the total of the following -
Monthly Housing Expense
You will often hear the term P.I.T.I. It refers to (P)rincipal, (I)nterest, (T)axes and (I)nsurance. While P.I.T.I. is not exactly the same as Monthly Housing Expense because it does not include homeowner's association dues, the two terms are often used interchangeably.
Lenders have learned over the years that a borrower's "top" debt ratio should not exceed 25%. In other words, a person's housing expense should not exceed 1/4 of his income. They will often stretch this number to as high as 28%, traditional lending theory maintains that anyone with a debt ratio in excess of 25% stands a good chance of developing budget problems.
The second ratio that a lender uses to determine if a borrower can afford
their obligations is the "bottom" debt ratio. It is defined
The only difference between the two ratios is the inclusion in the numerator of "debt payments." Debt payments include the following:
What is not included in "debt payments" is Utilities such as PG&E, water or telephone and payments on real estate loans. Real estate loans are usually offset first by the net rental income from the property. If the borrower has a net positive cash flow from all his rentals, then the net income is usually added to his "gross monthly income." If the borrower has a net negative cash flow from all of his rental properties, then the amount of the negative cash flow is usually added to the numerator of the "bottom" debt ratio as if it were a monthly debt obligation, like a car payment.
Traditional lending theory maintains that a borrower's "bottom" debt ratio should not exceed 33 1/3%. In other words, the total of the borrower's housing expense and debt obligations should not exceed 1/3 of his income. We often will stretch on this ratio to as high as 50%. Obviously a loan with a debt ratio of 40% is a far more risky loan than a loan with a debt ratio of 32%. Have Questions? Want to talk about Debt Ratios? Give us a call today or use our Quick Apply application for a fast response.
The most important ratio to understand when applying for an Commercial
income property loan is the debt service coverage ratio. It is
To understand the ratio it is first necessary to understand the numerator and the denominator. We'll take a look at net operating income (NOI) first.
Net operating income is the income from a rental property left over after paying all of the operating expenses:
Gross Scheduled Rents $100,000 Less 5% Vacancy & Collection Loss $5,000 ________ Effective Gross Income: $95,000 Less Operating Expenses Real Estate Taxes Insurance Repairs & Maintenance Utilities Management Reserves for Replacement Total Operating Expenses: $30,000 Net Operating Income (NOI) $65,000
Please note that the lender will always insist on some sort of vacancy factor regardless of the actual vacancy rate in an area to cover collection loss. In addition the bank always insists on using a management factor of 3-6% of effective gross income, even if the property is owner-managed. The lender's logic is the fact that they would have to pay for management if they ever took back the property. Finally, NOTE THAT LENDERS DO NOT INCLUDE LOAN PAYMENTS AS AN OPERATING EXPENSE.
Next let's look at the denominator, Total Debt Service. This includes the principal and interest payments of all commercial loans on the property, not just the first mortgage. NOTE THAT WE HAVE NOT INCLUDED TAXES AND INSURANCE. They were already accounted for above when we arrived at net operating income (NOI).
To calculate the debt service coverage ratio, simply divide the net
operating income (NOI) by the mortgage payment(s).
For the sake of simplicity, let us assume that there is only one mortgage
on the property:
Obviously the higher the DSCR, the more net operating income is available to service the debt. From the bank's viewpoint it should be clear that they want as high a DSCR as possible.
You, on the other hand, want as large a commercial mortgage as possible. The larger the loan, the higher the debt service (mortgage payments). If the net operating income stays the same, and the loan size and therefore the debt service increases, then the lower the DSCR will be.
Life insurance companies are very conservative and generally require a 1.25 or 1.35 DSCR. This means that their loan-to-value ratios are low. Savings and loans (S&L's) generally only require a 1.20 DSCR, and they sometimes will accept a DSCR as low as 1.10.
A DSCR of 1.0 is called a break even cash flow. That is because the net operating income (NOI) is just enough to cover the mortgage payments (debt service).
A DSCR of less than 1.0 would be a situation where there would actually be a negative cash flow. A DSCR of say .95 would mean that there is only enough net operating income (NOI) to cover 95% of the mortgage payment. This would mean that the you would have to come up with cash out of your personal budget every month to keep the project afloat.
Generally lenders frown on a negative cash flow. In some instances, a bank will allow a negative cash flow if the loan-to-value ratio is less than around 65%, the borrower has strong outside income such as an electronic engineer, and the size of the negative amount is small. Rarely will a lender allow negative cash flows on loans over $200,000. Lets talk about your Commercial Loan! Give us call today or try our Quick Apply application for fast results!
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