Many commercial real estate investors contact our company and want to know in advance if their transaction is eligible for institutional financing [banking] commercial mortgages. Unlike residential lenders, commercial mortgage lenders do not issue "pre-approval"; we cannot judge whether the transaction will be completed before we underwrite. However, we can share with you some of the basic guidelines that almost all traditional lenders are considering today.
Loan value [LTV]
During the "credit crunch", LTV has been greatly reduced. Just 24 months ago, we saw that the LTV ratio was higher than 80%, and the lender allowed a large second mortgage. The standard has tightened. In today's credit environment, investors should not expect any loan offer to be higher than 75%, and many offers are clearly lower. 70% is the normal LTV ratio that is newly purchased, and some lenders are willing to reach 75% through refinancing loans. The second mortgage loan undertaken by the seller was discouraged and was often completely banned. Borrowers and sponsors who do not have a large amount of cash investment in the transaction will be turned away.
Debt Service Coverage [DSCR]
Banks, insurance companies and Wall Street brokers will no longer provide loans to underperforming or vacant buildings. Only stable assets need to apply for institutional funding. Buildings must be able to demonstrate profitability and low vacancy rates. To obtain a bank loan to buy or refinance an apartment building, the building's net operating income [NOI] must equal 125% of the proposed mortgage payment [DSCR is 1.25]. Transactions that do not meet this requirement must wait until the credit market improves or seek private funding.
credit
Borrowers or sponsors with lower credit scores are being completely rejected by the bank. In order to obtain low-interest loans with good terms from institutional lenders, all major borrowers need to have a triple combined credit score of 640 or higher. I know this is bad news for many good people with problems with credit reports, but this is the way it is now.
experience
Banks are reluctant to venture into first-time apartment investors. All borrowers now need to show real experience and success records of rental housing.
Net worth and liquidity
Many banks have a policy that requires their borrowers' net assets to be at least equal to the loan balance they are seeking. In other words, if you want to borrow $1 million from a bank to buy an apartment building, you need at least $1 million in net assets. In addition, they want to see that you have some funds in your bank that exceed your funds for down payment. Usually they will ask the borrower to have a savings account balance equivalent to a 6-9 month mortgage payment.
Excellent location for quality properties
In order to obtain financing from traditional lenders, buildings must be located in cities or towns that are not particularly economically low. For example, a swipe area of MI, FL, CA or NV will be avoided. In addition, the structure must be properly maintained and the lenders will avoid buildings that have a large number of extended maintenance.
Transactions that meet these basic requirements will find that there is no shortage of liquidity even in this tight credit market; there are enough apartment loan funds for eligible borrowers and buildings. Unfortunately, for transactions that fail to meet these higher loan standards, investors will have to seek private funding, often referred to as hard money loans, or accept a wealthy partner to get funding.
Orignal From: Commercial Mortgage - Bank Requirements for Multi-Family (Apartment Building) Loans
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