Understanding the commercial real estate loan underwriting process can give you a big advantage when seeking debt financing for a commercial property. In this short article we’ll discuss how lenders underwrite commercial real estate loans, how they determine the maximum loan amount for a property, and then we’ll tie it all together with a clear example.
Before a new loan goes through the full underwriting and credit approval process, the lender and the borrower will often have a preliminary discussion. The purpose of the discussion is to get a better understanding of current interest rates, the bank’s current internal loan policy on underwriting ratios, including the loan to value ratio and debt service coverage ratio, as well as any possible lender adjustments to Net Operating Income (NOI).
At this stage the borrower might submit a rent roll and a real estate proforma for the lender to evaluate internally. Typically the lender will discuss the deal internally with the senior lender or credit officer, and if the bank is comfortable with the deal then they’ll issue a term sheet and move forward with the full underwriting process.