Quick answer: Commercial real estate lenders mainly want to know two things:
(1) if your property can generate enough income to repay the loan
(2) if you’re financially prepared to support the investment.
They will typically review your DSCR and LTV, as well as your borrower experience and down payment. Traditional banks often have stricter credit and documentation requirements, while private/direct lenders focus more on your asset.
Commercial real estate investors trust Private Capital Investors to get capital for their properties. As a direct private lender, they give you a flexible and quicker way to secure the financing you need to expand your portfolio or fund your CRE projects.
Getting a commercial real estate loan can help you buy or improve an income-producing property, as well as refinance your current commercial mortgage. To qualify for one, you have to understand what lenders are looking for during your application.
Lenders mainly focus on your personal income and credit when you apply for a home loan, but when you apply for commercial real estate financing, they’ll pay more attention to the asset itself:
your CRE property. They’ll want to know how much income it produces and if that income can cover the loan payments. They’ll also want to know how the property is likely to perform over time.
Your experience as a borrower and plans for the property still matter, but lenders will usually look at a few other key areas for commercial real estate loans.
Debt service coverage ratio
Does your property make enough money to cover the loan payments? Lenders will look at your debt service coverage ratio (DSCR) to find out.
To calculate your DSCR, you divide the property’s net operating income (NOI) by its annual debt payments. So, if your DSCR is 1.25x, your property generates $1.25 in NOI for every $1.00 you need to put toward the debt.
Many lenders want to see a DSCR of around 1.25x or higher, although that number can change depending on the lender, property type, and overall deal.
Credit expectations
Your credit score is usually not a top priority when you apply for a commercial real estate loan. But of course, it still helps to have a decent credit score in the mid-600s or higher, especially when you want the lender to finance a larger share of the property’s value.
Down payment and LTV
When you’re buying a commercial property, lenders usually expect you to put some of your own money into the deal. Having more equity in your property helps reduce risk for the lender because you’re showing that you have your own money riding on the success of the investment.
More than that, your down payment determines your loan-to-value ratio (LTV). Put simply, LTV tells the lender how much you’re borrowing compared with what the property is worth.
Say you’re buying a property worth $1 million and need to borrow $700,000. The LTV in this case is 70%. So the more money you put down, the lower your LTV will be.
For many commercial real estate loans, LTVs tend to fall in the 60% to 75% range, although the limit depends on the lender and property type, as well as the loan program and overall deal.
Your property’s income
At the end of the day, your lender always wants to ensure that your property can make enough money so you can repay the loan. This is why they usually focus on how your property performs by looking at your net operating income (NOI).
NOI is the income your property has left after you subtract its operating expenses, before you make any loan payments. Since the income a commercial property generates can also influence its value, lenders refer to your NOI during underwriting and valuation.
From there, the lender can use your NOI to work out your DSCR. So if your property has a DSCR of 1.25x, you’re bringing in 25% more NOI than you need to cover the annual debt payments.
That extra breathing room is important just in case something happens, like you lose a tenant or face higher operating costs. Your lender wants assurance that your property can still bring in enough money so you can keep up with the loan payments even during difficult times.
Borrower experience
Besides looking at your property, the lender also wants to know if you have the experience to manage it and follow through with your plans. Having experience in buying or even repositioning similar commercial properties can help your application because it shows the lender that you know that you have handled similar investments before.
However, you can still qualify for financing even if this is your first commercial property. You can strengthen your application by partnering with someone who has more experience or bringing in a professional property management company.
This lets you show the lender that you’ll have experienced people helping you run the property and carry out your business plan, even though you’re new to commercial real estate.
Documentation checklist
Be ready to share quite a bit of paperwork when you apply for a commercial real estate loan. Your lender needs this information to get a clear picture of everything from your finances and current debts to your business structure and the property you want to finance.
Depending on the lender and the type of loan, you may need:
- Borrowing entity documents – If you’re borrowing through a business entity, you may need Articles of Incorporation or Articles of Organization.
- Financial statements – Have your balance sheet and income statement, as well as your cash flow statement ready.
- Debt schedule – Put together a list of your current debts and what you’re paying on them.
- Tax returns – A lender may ask for your business and principal-owner tax returns, sometimes going back three years.
- Property documents – Your lender may want to review anything from an appraisal or survey to the owner’s title policy and environmental report.
- Business permits and licenses – Be prepared to provide any licenses or permits that apply to your business or property.
- Personal financial statements – Principal owners may also need to provide recent, signed financial statements.
How private/direct lenders qualify differently from banks
Apart from traditional banks, you can also consider getting your commercial real estate financing from private and direct lenders. This can be especially helpful when your property or financing needs don’t fit neatly into conventional bank requirements.
When assessing you, private/direct lenders can take a more asset-focused approach: they may look closely at your property’s value and your plans, as well as how you intend to repay or refinance the loan. This makes them more flexible when you need help closing quickly or financing a property that’s undergoing renovation or repositioning. However, you’ll generally pay more because private financing often comes with higher interest rates.
Here’s a quick comparison:
| Feature | Traditional Banks | Private/Direct Lenders |
|---|---|---|
| Primary Focus | Borrower credit, financial strength, and stable property cash flow | Property value, deal strength, business plan, and exit strategy |
| Approval Time | Often takes longer because of more extensive underwriting and approval requirements | Can move more quickly, depending on the lender and complexity of the deal |
| Credit Requirements | Generally stricter credit standards | Can offer more flexibility depending on the property and overall deal |
| Documentation | Typically requires extensive financial and property documentation | May offer lower-documentation or more asset-focused underwriting |
| Property Profile | Often favors stabilized properties with predictable cash flow | May consider transitional, renovation, lease-up, and repositioning opportunities |
| Interest Rates | Generally lower for borrowers who meet conventional lending requirements | Generally higher to account for greater flexibility and risk |
Need a loan for commercial real estate?
Get in touch with us here at Private Capital Investors and see how you can qualify for a CRE loan with a private direct lender. Call us at 972-865-6205.
FAQs:
What do lenders look for in commercial real estate loans?
Lenders want to know if your property can generate enough income to support the loan. Likewise, they want to ensure that you’re financially prepared to handle the investment. This is why they often look at your property’s DSCR and LTV, as well as its overall financial performance. Your experience as a borrower also matters when you’re taking out a CRE loan.
How do private/direct lenders underwrite commercial real estate loans?
Private/direct lenders follow an asset-based approach when underwriting your loan. They may focus more on your property’s value and the strength of the deal, as well as your exit strategy.
This can also shorten the underwriting process, which can be great if you need to close quickly or are financing a property that doesn’t meet conventional bank requirements.
Do lenders look at my creditworthiness for commercial real estate loans?
Yes, since your creditworthiness can still affect the terms of your loan. Requirements vary between lenders and loan programs, but it helps to have a credit score in the mid-600s or higher. With a strong credit profile, you’re more likely to qualify for competitive rates and terms.
How do I build my creditworthiness for commercial real estate loans?
Reviewing your credit report helps, especially before you apply. This allows you to address any errors right away so they don’t affect your application. You can also work on paying down existing debts and making your payments on time. Keeping your credit utilization under 30% can help, too
How high are interest rates for commercial real estate loans?
There isn’t one standard interest rate for every commercial real estate loan, since your rate can depend on different factors like the lender and your LTV. You can typically expect lower rates from traditional banks, especially when you and your property meet their underwriting requirements. Private/direct lenders often charge higher rates because they can take on deals that require faster closings. Plus, you benefit from more flexible terms and asset-based underwriting.
With bridge and hard money loans, private lenders may put more weight on your property and exit strategy when deciding approval. You may pay a higher rate for that flexibility, but you can also benefit from a shorter approval and closing timeline.
Sources:
- https://www.talimarfinancial.com/how-to-qualify-for-a-commercial-real-estate-loan-what-lenders-look-for/
- https://voitco.com/down-payment-requirements-for-commercial-properties/
- https://www.commercialrealestate.loans/blog/what-you-need-to-know-before-applying-for-a-commercial-real-estate-loan/
- https://www.investopedia.com/terms/c/commercial-real-estate-loan.asp
- https://www.americanbar.org/groups/real_property_trust_estate/resources/real-estate/commercial-real-estate/
- https://uniqueprop.com/blog/how-much-do-i-need-to-put-down-on-a-commercial-property/
- https://www.crews.bank/blog/commercial-loans/tips-for-securing-a-commercial-real-estate-loan
- https://corporatefinanceinstitute.com/resources/commercial-lending/commercial-loan/
- https://privatecapitalinvestors.com/blog/current-commercial-real-estate-loan-rates/
