In commercial real estate lending, there are four main metrics that influence loan underwriting: loan-to-value (LTV) ratios, cash-flow analysis, borrower’s credit history, and property value. Understanding these four metrics, conducting your own initial due diligence in regards to them, and then preparing documentation for your lender to support them can speed up the underwriting process for your loan, especially if you’re working with a hard money or bridge lender. A faster underwriting process means you can get your funds more quickly.

Although all four metrics are considered regardless of the type of loan, it’s important to understand that lenders will weight them differently in evaluating different types of loans. While acquisition and refinancing loan evaluations typically place equal emphasis on all four metrics, construction loan evaluations often de-emphasize cash-flow analysis. Additionally, hard money lenders care more about LTV rates and property value than the other two metrics, so those will have more weight in their loan evaluations.

Four Main Underwriting Metrics

1. LTV rate. This is the ratio of the property loan amount to the property’s value. The property’s value is typically determined through a commercial appraisal commissioned by the lender (click here to read more about commercial property appraisals). LTV rates may vary from lender to lender depending on how they determine the property value. The important thing to understand as a borrower is that the higher the LTV is, the more the lender is risking, so high-risk properties will be offered lower LTV rates (between 50 to 60% ) while only truly low-risk properties may qualify for slightly higher LTV rates (between 60% to 65%) ). Most hard money lenders cap their LTV ratios at 65%.
2. Cash-flow analysis. This analysis involves calculation of the debt service coverage (DSC) ratio, in which the property’s annual net operating income is divided by its annual debt service on the loan. The higher the ratio, the less the risk to the lender. This ratio is typically given more emphasis by institutional lenders than hard money lenders. In addition, banks are now required to look at a borrower’s global DSC, not just the DSC for a specific property.
3. Credit history. This is another metric that is given more weight by institutional lenders than by hard money lenders. Institutional lenders will fully vet a borrower’s credit history with background checks, credit references, and financial information about the property as well as the borrower. While hard money lenders will also want this information, their guidelines are typically much more flexible than banks. These hard money or bridge lenders will listen to the reasons for any black marks or low scores on a borrower’s credit history. They will also focus more on the financial information about the property, especially if it is an income-producing one, than on the borrower’s personal credit.
4. Property value. This is the make-or-break metric for any loan evaluation. If the property does not score well enough in the loan evaluation, then none of the other metrics will matter. Age, appearance, and accessibility are the three main factors that affect property value beyond the obvious one of location. Properties in major metropolitan areas are more likely to receive approval than those in rural areas, and within those metropolitan areas lenders will often favor certain neighborhoods over others. This is why it’s often important to work with a lender who knows the area in which the property is located so that its value is properly understood.

If you have a commercial loan request or any questions about Montegra’s underwriting guidelines and process, contact us at 303-377-4181.