Commercial Loan Underwriting

Commercial loan underwriting is found to differ according to the type of commercial loan that is being applied for by a borrower. The financial institutions or individual lenders who grant the loans underwrite the loan requests on the basis of the certain factors that must be met by the borrower. After these factors are studied, the money lenders would make their decision as to whether to grant the commercial loan or deny it.

The factors on the basis of which commercial loan underwriting is done nowadays include cash flow analysis, loan to value, credit worthiness and property analysis. The financial institutions or individual lenders take into account all these factors before making their decision on approving the request for a commercial loan.

Cash flow analysis: The factor that plays a major role in determining commercial loan underwriting is an analysis of the cash flow. An idea about the cash flow can be formed from the debt coverage ratio, which is usually referred to as DCR. It is the ratio of the income of the borrower to the debt taken by them, and is also known as debt coverage service ratio [DCSR]. The ratio helps in determining whether the borrower will be able to repay the loan in time. Commercial lenders prefer the DCR to be higher than 1, as it suggests that the borrower is capable of repaying the commercial loan being taken. Therefore the DCR is an important factor that is taken into account by lenders while approving loan requests, and is indispensable for commercial loan underwriting.

Loan to value: Another factor that is regarded to be of much importance when it comes to commercial loan underwriting, is the loan to value ratio. It is measured as the ratio of the loan that is being taken to invest in a commercial property, to the actual value of the commercial property. The financial institutions or the other lenders who will be providing the commercial loans require that the borrower has to pay some percentage of the price for which the property is being bought, while the major percentage will be provided as a loan. Thus it can be easily understood that the loan to value ratio can be regarded as a determining factor when it comes to commercial loan underwriting.

Credit worthiness: Prior to approving a commercial loan, the commercial loan providers look into the details of the credit of the borrower of the loans. The credit history of the borrower needs to be quite good, if the commercial loan that is sought by them needs to be approved. Borrowers have to prove their credit worthiness before the lenders, prior to getting their loan sanctioned. So far commercial loan underwriting, credit worthiness is regarded as one of the prime factors.

Property analysis: Quite often the commercial loans that are sought by borrowers are used to purchase some property. In such cases, before sanctioning the loans, the financial institutions or other parties that provide the loans, take into account the value of the property and the rent that would be generated by it. Several other factors like the location and condition of the property are also considered. Thus before commercial loan underwriting, it is mandatory to make a property analysis.

These are the important factors that are taken into consideration by any financial institution or other commercial money lenders, before approving a commercial loan.