Anatomy of a good commercial loanAnatomy of a good commercial loan
By Christopher Perez
Copyright
¿2005
In simple terms if you follow “CIC” or credit, income & collateral, when sourcing for commercial
loan candidates you can’t go wrong. This very basic information allows you to qualify the good from the bad & can
be gathered in 2 minutes time. This will prevent you from wasting valuable time with deals that will never fund.
First
is credit or FICO score. FICO scores range from 900 being perfect to 400 being the worst. Most lenders use a three credit
score report called a tri-merge to determine a borrower’s credit grade. The three major credit reporting agencies are
TransUnion, Experian, & Equifax. Typically lenders will look at the middle FICO score to grade a loan. FICO determines
a yes or no, loan to value “LTV”, loan terms available, & interest rate. Even a couple points difference in
credit score can change a deal dramatically. Here is what a typical grading system may look like.
• A+ 700 or
above – Pristine credit, the best of the best, the most competitive rates, LTV’s as high as 90%, with 30 year
terms available.
• A 680 to 700 – Very solid, good rates, LTV’s still 80-90%, with 30 year terms available
•
A- 640 to 680 – Not bad, rates fair, LTV’s 70-80%, terms can reduce to 20-25 years
• B 600 to 640 –
Questionable, credit is now analyzed very carefully, mortgage history vital, B credit rates, LTV’s 60-70%, terms can
be reduced to 15 years
• C 600 & below – Typically unbankable, double digit rates common, under 60% LTV’s
offered, terms can be as little as 12-36 months
Be careful when grading a deal according to credit. Sometimes anomalies
can occur. For example a borrower could have a 700 mid FICO, but also have a 2x late on their mortgage history. Even though
this borrower meets the lenders rate guidelines the mortgage lates will affect an underwriter’s decision significantly.
Second
is the income analysis. Income can be the property income & or the borrowers personal income. Most lenders look at both.
The ability to pay the loan payment with some cash in reserve is what lenders are looking for. A good rule of thumb is 1.2
“DSCR” or debt service coverage ratios for multifamily properties & above a 1.25 for all other property types.
When a property such as multifamily has a strong rental income personal income becomes much less important. For owner occupied
properties, such as an auto repair shop, personal income now becomes a deciding factor in approving the loan because the property
itself doesn’t generate income the business does. “DTI” or debt to income ratio is also analyzed. This is
the borrower’s debt as it is compared to their income. A general rule for lenders would be 55% DTI, and 80% DTI if owner
occupied. An adjustment for assets would make it 45% for investor properties and 65% for owner occupied properties. This means
that before adjustment for liquidity, the DTI could be 60% and 80%, respectively.
There are commercial programs similar
to “No Doc” in the residential world called stated income stated asset that do not look at personal income. If
you are purchasing an apartment building and you are showing losses on your personal tax returns, a stated income-stated asset
loan would be for you. However, the properties income is still disclosed in the appraisal and it must debt service in order
for the loan to work. Since the loan is stated, lenders are a bit more lenient and will allow the loan to fund even at .8
DSCR. This means that on paper the property is at a 20% loss annually. Why would somebody buy such a property? Because they
truly believe the property was mismanaged and they will raise the rents, reduce expenses and the property will be cash flowing
beautifully. Stated income stated asset loans are based on good credit scores and solid property types,. Rates will be higher
& LTV’s will be lower on stated deals. There are an extremely limited number of good stated lenders in the industry.
Lastly
you have the collateral or property types. Property type, similar to credit score will determine LTV, rates, & terms available.
The best & most desired property types by lenders are the vanilla ones i.e. multifamily, retail, office. The converse
would be the special purpose or single use properties i.e. car wash, hotel/motel, industrial, restaurants. Restaurants rate
right up there with nuclear power plants due to the high failure rates. Common property type tiers, tier 1 being the best
to tier 4 the worst are as follows:
I. Multifamily, mixed-use
II. Retail, office, warehouse, self storage
III.
Rooming house, B & B, campground, car wash
IV. Restaurant, hotel/motel, day care, funeral home
Keep in mind
each lender has their niche. Some love mobile home parks, while others love auto repair, & some like neither. Find your
lenders sweet spot.
Again the “CIC” credit, income, & collateral rule of thumb can expedite your qualification
process thus saving you valuable time. Good time management leads to a healthy bottom line.
Christopher Perez now
works with over 1100 brokers on a daily basis.
Christopher Perez is the director of Commercial Loan Consultants, a
national commercial-loan-placement firm. He advises more than 700 residential brokers nationwide. In addition, he provides
a comprehensive training program for residential brokers looking to branch out into commercial-loan origination. Contact him
at (877) 473-6984, e-mail
[email protected] or visit
www.clcloans.net.
