Parameters for Underwriting a Loan
What Is Underwriting?
Underwriting a commercial mortgage loan is a method of assessing whether the risks associated with the lending is to acceptable limits. Various parameters are used by the lending agency to assess the risks and approve the loan.
What Parameters Are Considered?
There is a very scientific method that is used in underwriting commercial mortgages.
Banks and other conventional lenders will consider the commercial profitability of the property to assess the risk. They will take into account the rent received from the property and calculate the repaying capacity of the borrower. They need to be convinced that the property will generate enough revenue to take care of the repayment of the loan.
The money lenders will assess the income that will be earned by the borrower after all his expenses, which means the net income. Based on this net income and the value of the property the banks or lenders will arrive at a cap.
Using the cap percentage and the net income, the banks will determine the value of the property. Taking into account the amount of mortgage payment the borrower will have to pay the lenders will arrive at the ratio between the income and the loan repayments.
If the income is above 1.25 times the mortgage payments, lenders consider this as a good prospect. Working backward the lenders will conclude what amount of mortgage payments the lender will be able to pay.
Another factor that will be considered is the LTV or the Loan To Value ratio. If the underwriters find that the loan amount based on the LTV is lesser they will then offer the lesser value as a mortgage.
Why Choose Private Lenders Over Banks?
While banks use all the above methods to arrive at the underwriting process, private finance companies like use their experience to assess the repayment capacity and offer loans purely based on the LTV. This makes the process of getting a loan much simpler and faster.
Private money lenders aim at approving a loan with the least amount of formalities and within the shortest possible time.