How Banks Underwrite your deal

You just got off the phone with an investment sales broker, and you are excited about an off-market property you just discussed. As a real estate investor, it’s important to understand the numbers going into your investment properties, and how to properly analyze them. When seeking a commercial loan, a loan credit officer will be looking for a few things to check out and make the loan work. What is the net operating income? How long are the lease end dates? Does this loan Debt Service? The lender will then take a look at the sponsor’s financial strength, credit history, bankruptcy, and/or criminal activity. With 45-60 days until closing a commercial loan, we need to get you up to speed as to how we’re going to get this loan approved.

What is underwriting?

Underwriting is the process of seeing if the analytical side, along with the financial strength of the borrower work for this loan. During the underwriting process, banks are going through all the information they received on the property being refinanced or purchased. Underwriting is the lender’s way of doing their due diligence on the property and on the sponsor.

What are the Real Estate Underwriting Steps:

Now that the lender has the loan request, what are these lenders looking for? Here are some important phrases you should familiarize yourself with, when being a real estate investor.

●  Net operating income

●  T-12 (Trailing Twelve)

●  Rent Roll

●  Debt Service/Debt service coverage ratio

●  Capitalization Rate

●  Personal Financial statement (PFS)

●  Borrower’s credit history

These are some terms that a lender will throw around upon requesting information for a loan analysis. Some of this information is self, understood while others have a deeper meaning.

 What to look for in a Rent Roll, and T-12?

This shows us the basic facts for the loan analysis without going too deep into it. On a rent roll, the lender is looking for a few things depending on the property type. If it’s a multi-family property they love to see a tenant on an annual lease, up to date on their rent payments. For other assets like retail, office, and industrial they are looking for longer leases for the tenant. The longevity of how long a tenant has already been there is important as well. The T-12 shows us over the last trailing twelve months, how this property has been producing. All this shows us ultimately if this property can sustain a mortgage.

A deeper look at the analytics of a lenders underwriting:

We need to find our Net Operating Income, which shows us what we walk away with after expenses. To get that you add your total net income, and subtract your total net expenses give us our NOI. An NOI helps us determine a cap rate on a property which is another big part of underwriting. First to get your cap rate you need to divide a property’s NOI by the estimated market value of a property. The cap rate shows you the investor what your potential rate of investment will be. Another important metric a lender uses is debt service. Debt service is the sum of interest payments and repayment of the principal. Each lender has its own ratio but the standard is 1.30x. The debt service coverage ratio shows the lender that the property is able to repay and sustain a mortgage and have the rest of the proceeds flooding into the investor’s pockets.

Analyzing the borrower:

Underwriting a loan isn’t only about the investment property itself. The loan analysis can check out but if you don’t meet the lender’s requirements as a sponsor, they will not give you a loan. Lenders need to make sure of a few things such as; a strong credit history, no history of bankruptcy or fraud, no criminal record, and finally that financially you have what it takes, with real estate experience. The lender’s first request on seeing a sponsor’s financial strength is to see a personal financial statement that shows them your Net Worth and Liquidity. These numbers are vital to the lender as it shows them if you are strong enough to handle this loan in case something goes sour in the future. Generally, for liquidity, the lender likes to see 10% of the loan amount liquid post-closing. That means after closing and the closing fees that you have enough. They will not give someone a commercial mortgage if it’s going to cause them to live on the edge.

How to speed up a loan approval?

In the RE world deals move quickly and sometimes we want to know that we can secure financing before getting along in an investment opportunity. Here are a few tips when working with a broker or a lender that you should take into consideration:

  1. Underwrite- Do your own research, and underwriting before showing a lender or mortgage broker. You need to know what the investment margins you are looking for, and if they check out before sending it over. You need to know this subject property inside and out.
  2. Have the paperwork ready to go- When working on a loan it can take some time to close, and it requires a lot of paperwork. It’s important to have the information at your fingertips to ensure you did what you need to speed up the process of closing.
  3. Ensure you meet the financial and legal requirements as a sponsor for this investment property.

In summary:

The next time you are looking at a RE investment, try and take the lender’s perspective on it. First, you should ask yourself, would you lend/ finance this property? It’s important to take away the emotional aspect and connection to the property. As an investor when putting 20-25% down, and having the lender have 70-75% of the risk, you need to see what they are thinking. Hope this helps you analyze your future deal, and give you a better understanding of the process of getting a commercial loan.

A special thanks to Yoel Goldberg from Eastern Union Funding for providing tremendous value and insight into this article. Yoel has been with EU for close to two years, having closed deals in various asset classes nationwide, with another five deals scheduled to close in the coming weeks. Feel free to contact Yoel with your next deal at