Commercial mortgages are primarily underwritten based on the net income generated by the property. In contrast, home loans are underwritten based on the financial strength and credit of the borrower. In fact, when the Loan Committee of a typical commercial lender sits down to analyze a commercial loan, they may spend over an hour analyzing the income and expenses of the commercial property and less than three minutes taking a cursory peak at the financial strength and the credit of the borrower.
One maddening aspect of commercial mortgage underwriting is the subjective nature of the process. To understand what I am trying to say, let's look at the opposite end of the spectrum - home loan underwriting.
Home loan underwriting has become a very objective process. It's almost all mathematical. If the home loan is less than 80% loan-to-value, if the borrower's bottom debt ratio is less than 32%, and if the borrower's credit score is greater than 700, the home loan will almost always be approved. The loan approval does not depend on the opinion of some underwriter. The underwriter simply plugs the numbers into some formula, and out pops the answer.
In stark contrast, commercial loan underwriting depends on the opinion of some moody, fallible, and unpredictable human being. Is the commercial property located in a good area? Are the tenants financially strong? Are the tenants likely to renew their leases? Can the property successfully compete for new tenants if the current tenants move out? These are subjective decisions. Some human will have to make these decisions, and that human is usually influenced by how hard the president of the bank is pushing to make new loans or by some horrible loan loss the lender has suffered making a similar loan in the past.
How can a borrower, a commercial mortgage broker, or even a portal like ours predict just what this human underwriter will decide? The reality is that he can't. This is the beauty of CommercialMortgage.com. Our 30,000 lines of code are dedicated to the reality that commercial lenders are moody and unpredictable. If one lender turns you down, no problemo. The user just submits his commercial loan to six more suitable commercial lenders.
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