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How Much Can You Borrow?
One of the first steps in obtaining a loan is to determine how much money you can borrow. In the case of refinancing or purchasing a commercial property, you should determine how much you can afford. You should do this before you begin your commercial property search. By answering a few simple questions, we will calculate your buying power, based on our standard lender criterion.
LTV and Debt-to-Income Ratios:
The Loan-To-Value (LTV) ratio is the maximum amount of exposure that a lender is willing to accept. Lenders are usually prepared to lend a higher percentage of the value to creditworthy borrowers. Commercial lenders build in “safety nets” for themselves. For example, most lenders will use a specific Debt Service Coverage Ratio (“DSCR” or “DSC”) for each commercial property type.
Net Operating Income (NOI):
Typically, the Net Operating Income (NOI) of the subject property is based on the most recent twelve month operating statement. The trailing twelve (T12), is the document used for this. You then take your NOI and divide it by a DSCR of say 1.25%. This ratio helps protect the commercial lender in the event there is a decline in the subject property income. The higher the DSCR a lender uses, the lower the loan amount they will ultimately lend on the subject property. Consequently, the safer the loan is for the lender. Typical DSCRs can range from as low as 1.00% up to 1.55% with the average being around 1.25%. This is true for Multifamily properties (apartment buildings of 5+ units). The required DSCR is typically higher for office buildings, retail, and other commercial real estate market segments.
Commercial Underwriting:
A commercial lender underwrites the subject property’s income and expenses. They will also underwrite the income and expenses of the borrower(s)/guarantor(s) as well. Another consideration in approving the maximum amount of loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. Many commercial lenders will now utilize what is known as a “global underwriting.” The commercial lender underwrites the borrower as carefully and as strictly as they do the subject property. The funding source will calculate the borrower’s debt in combination with the subject property’s debt.
Borrowers with personal, high debt-to-income ratios may need to pay a higher down payment or bring in additional equity. This could be one of the requirements in order to qualify for the loan. It is also possible that a borrower/guarantor may need to pay down, or possibly pay off in full other debts. These could include any personal revolving debt or personal car loans if their personal debt-to-income ratio is too high.
Credit Scores & Midscores:
Credit cores reflect credit risk of the individual in comparison with that of general population. It is based on a number of factors including past payment history, total amount of borrowing, length of credit history, searches for new credit (aka credit report inquiries), and type of credit established. When you begin shopping around for some type of new credit whether it is for a new credit card, a new car loan, a new mortgage on a residence, or a new commercial mortgage for a commercial property, that credit entity/lender runs your credit report which can lower your credit score a little bit each and every time it is run. Therefore, it is advisable that you authorize the mortgage professional to run your credit report only after you have chosen to apply for a loan through them.
Midscores are the middle credit score, not the average credit score, of a borrower’s three major, credit bureau scores on their personal credit report. Midscores are used by virtually all commercial mortgage lenders in their credit decisions. It is a quantified measure of credit worthiness of an individual. For example, if a borrower has a 700 Experian(TM) score, a 735 TransUnion® score, and an 810 Equifax® score, their Midscore is a 735. The lender essentially throws out the high and low scores and really only looks at the middle score, again, not the average as one would think, but the middle!