Many commercial real estate investors contact our firm and want to know in advance if their deal may qualify for an institutionally funded commercial (bank) mortgage loan. Unlike residential lenders, commercial mortgage lenders do not issue “prior authorizations”; We just can’t tell if a deal will close until we sign it. However, we can share with you some basic guidelines that virtually all mainstream lenders are considering today.
Loan on value (LTV)
The LTV has been drastically reduced during this “credit squeeze.” Just 24 months ago, we were seeing LTV rates above 80% and lenders allowed large second mortgages. The standards have been tightened. In today’s credit environment, investors shouldn’t expect to see any loan offerings above 75% and many are coming down significantly. 70% is a normal LTV ratio on new purchases, and some lenders are willing to go 75% on refinance loans. Seller-made second mortgages are discouraged and often rejected outright. Borrowers and backers without large cash investments in a deal will be turned away.
Debt Service Coverage Ratio (DSCR)
Banks, insurance companies, and Wall Street brokers will simply no longer issue loans against vacant or underperforming buildings. Only stabilized assets need to apply for institutional financing today. A building must be able to demonstrate a history of profitability and low vacancy. To be approved for a bank loan to purchase or refinance an apartment building, the building must have a net operating income (NOI) equal to 125% of the proposed mortgage payment (a DSCR of 1.25). Deals that do not meet this requirement will have to wait until credit markets improve or seek private financing.
Credit
Banks are summarily rejecting borrowers or backers with weak credit ratings. To qualify for a low-interest loan with good terms from an institutional lender, all major borrowers must have a combined triple credit score of 640 or better. I know this is bad news for many good people with bad credit reports, but it is right now.
Experience
Banks are unwilling to take a chance on apartment investors for the first time. All borrowers must now demonstrate real rental housing experience and a track record of success.
Net worth and liquidity
Many banks have instituted a policy of requiring their borrowers to have a net worth at least equal to the balance of the loan they are seeking. In other words, if you want to borrow $ 1MM from the bank to buy an apartment complex, you need a net worth of at least $ 1MM. Also, they will want to see that you have some money in the bank beyond the funds you are using for the down payment. Often times, they will require borrowers to have a savings account balance equal to 6-9 monthly mortgage payments.
Quality property in good location
To secure financing from a traditional lender, the building must be in a city or town that is not particularly financially depressed. The worst affected areas of MI, FL, CA or NV, for example, will be rejected. Also, the structure must be in good repair, lenders will avoid buildings that have a lot of deferred maintenance.
Deals that meet these basic requirements will find that there is no illiquidity even in this tight credit market; There is a lot of money for apartment loans for borrowers and buildings that may qualify. Unfortunately, for deals that cannot meet these higher loan standards, investors will have to seek private financing, often called hard money loans, or hire a wealthy partner to obtain financing.
