Financial Funding LLC Crucial Underwriting Metrics and Practices
NEW YORK, Nov. 14, 2013 /PRNewswire/ -- The mortgage professionals at Financial Funding LLC want to share with you our underwriting Metrics and practices to help you with your commercial loan application.
A commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping center, industrial warehouse, or apartment complex. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
There were $3.1 trillion of commercial and multifamily mortgages outstanding in the U.S. as of June 30, 2013. Of these mortgages, approximately 49% were held by banks, 18% were held by asset-backed trusts (issuers of CMBS), 12% were held by government-sponsored enterprises and Agency and GSE-backed mortgage pools, and 10% were held by life insurance companies.
Commercial real estate loan applications are underwritten on a case-by-case basis. Every loan application is unique and evaluated on its own merits but there are a few common criteria lenders look for in a commercial loan application package.
Financial Funding LLC usually require a minimum debt service coverage ratio which typically ranges from 1.1 to 1.4; the ratio is net cash flow (the income the property produces) over the debt service (mortgage payment). As an example if the owner of a shopping mall receives $300,000 per month from tenants, pays $50,000 per month in expenses, Financial Funding LLC will typically not give a loan that requires monthly payments above $227,273 (($300,000-$50,000)/1.1)), a 1.1 debt cover.
Financial Funding LLC also looks at loan to value (LTV). LTV is a mathematical calculation which expresses the amount of a mortgage as a percentage of the total appraised value. For instance, if a borrower wants $6,000,000 to purchase an office worth $10,000,000, the LTV ratio is $6,000,000/$10,000,000 or 60%. Commercial mortgage LTV's are typically between 55% and 70%, unlike residential mortgages which are typically 80% or above.
Financial Funding LLC looks at rents per square foot, cost per square foot and replacement cost per square foot. These metrics vary widely depending on the location and intended use of the property, but can be useful indications of the financial health of the real estate, as well as the likelihood of competitive new developments coming online.
Since the financial crisis, Financial Funding LLC had to start to focus on a new metric, debt yield, to complement the debt service coverage ratio. Debt yield is defined as the net operating income (NOI) of a property divided by the amount of the mortgage.
Financial Funding LLC will complete a thorough due diligence on a proposed commercial mortgage loan prior to funding the loan. Such due diligence often includes a site tour, a financial review, and due diligence on the property's sponsor and legal borrowing entity. We may also commission and review third-party reports such as an appraisal, environmental report, engineering report, and background checks.
The fair market value and fair market rents (if appropriate) will be evaluated based on Financial Funding LLC analysis of an appraisal. Depending on the property involved, factors that will be evaluated may also include the age, appearance, location, local market, and accessibility. Federal, state and local requirements for permits and licensing will also be considered. Special use properties may require additional underwriting. As always, be sure to discuss the underwriting practices early in the application process with the mortgage professionals at Financial Funding LLC.
SOURCE Financial Funding LLC