Property owners conducting a commercial mortgage refinance are often surprised by the new range of loan programs that have become available in the last 5 years. Programs such as commercial 30 year fixed, second lien position loans, etc are turning heads. However the process is still expensive and time consuming and underwriting is still tied to the fundamentals - loan to value, debt service coverage ratios, global income, property analysis, and credit worthiness of the borrower.
Below is a brief description of the underwriting guidelines for refinancing a commercial mortgage.
LTV
Loan to value restrictions on your typical commercial mortgage refinance are limited to 80% on rate and term and 75% on cash out refinances. However this guild line is what separates many banks from each others. Some get more aggressive and offer higher ltv's while others stay conservative and stay well below the percentages mentioned above.
This ratio is critical to banks as they underwrite files with the worst case scenario in mind - "what if the borrower defaults and we have to take this property back and sell it on the open market?" The lower the loan to value, the less risk for the lender and therefore lower rate for the borrower.
DSCR
On investment properties the Debt Service Coverage Ratio restrictions are typically set at a 1:1.25. Meaning that for every $1.25 of net income (income after taxes, insurance, repairs, etc) the property produces, the mortgage payments cannot exceed $1.00. Said in another way, after all expenses and the mortgages have been paid, the owner needs to net $.25 to qualify for the typical commercial mortgage refinance.
Lenders that allow lower DSCR are considered more aggressive (and normally charge higher rates) while banks with higher DSCR requirement are the considered the opposite - more conservative.
Global Income
For owner occupants a different type of ratio is used called the Global Income approach. Basically this ratio compares ALL income the borrower has, including business profit, salary, dividends etc to ALL the expenses the borrower has including personal and business. The maximum Global ratio normally is 60%. For example, on monthly basis, if the borrower's total personal and business income is $10,000, his total monthly debt payment would not be allowed to exceed $6,000.
Property Analysis
The type of building being refinance has a major impact on what financial options are available. For example, there's a huge difference in what a restaurant would qualify for vs. an apartment building. Market value, market rent, appearance, location, accessibility, local market conditions, as well as other factors play a major role into what refinance options will be available.
Credit Worthiness
The personal credit worthiness of the borrower will be heavily scrutinized as this is an important component. A 680 credit score is the threshold for the best finance options. For smaller mortgages, credit scores play a bigger role in the underwriting decision and interest rates are heavily influenced by the borrower's credit score.
Every commercial mortgage refinance is unique and needs to be considered on an individual basis. However, the above can give you a good idea of what the basic underwriting parameters are.
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He specializes in Commercial Real Estate Loans between $100,000 - $5,000,000. Offers unique loan programs such as Commercial Second Mortgages, Commercial 30 Year Fixed and 90% non SBA financing, Commercial Equity Lines. 248 885-8797 or at commercial mortgage leads or commercial real estate loans
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