Analyzing a Commercial Mortgage Loan – Introduction
Over the past 18+ years, my firm and I have seen and analyzed basically every kind of commercial mortgage deal in the marketplace, and have determined whether or not we felt that they had the possible to be funded. The last phrase is really the meaningful, and is where I want to start this first look into the commercial funding course of action.
If you are a residential mortgage broker or investor that wants to begin to get involved in the commercial side of the market, one of the keys will be your ability to take a look at a character and determine if it is viable in terms of being able to sustain a loan. You can tell fairly early on in the time of action if it is worth the time, or is a waste of time. Remember, with commercial mortgage loans it is not about LTV, but it is about the INCOME that the given character produces. This requires a little bit of a change in thinking, but it is imperative that you understand this. I am consequently going to say it again. LTV is out when thinking about commercial mortgage financing. It is all about the verifiable income that a building produces, and how well the net income will service the desired loan. The amount of a loan that someone will qualify for, or LTV, comes into play ONLY after an underwriter calculates the debt service coverage (we will look at this number later) of a given loan amount at a given rate of interest. While on the surface this all sounds very complicated, it really isn’t. What it is, is a fairly straight forward progression that you will follow.
Is the quality of your borrower important when looking at a commercial mortgage loan? Of course it is to the extent that certain lenders require a credit score over 650, some require it over 700 for certain loan types and certain types of lates, such as mortgage lates will kill a loan before the time of action already starts.
This is all a fleeting introduction into the time of action that we will be examining over the next few articles which, by the end, will put you in a position to be knowledgeable about the time of action, and comfortable prospecting for commercial mortgage deals. What are some of the areas that we will look at?
- Net Operating Income
- Capitalization rate
- Debt service coverage ratios or DSCR
I will leave you with this basic rule of commercial mortgage finance:
An income producing character must be able to sustain a loan with the net operating income that it produces.