Commercial Mortgage Loans - What Does it Take to Get a Bank

I'm not going to sugarcoat this; I'm going to give it to you straight. It is extremely difficult to get approved for an institutionally (bank) funded commercial mortgage loan now-a-days. In this environment, most investors and most deals are being turned away by the banks, the insurance companies and the Wall Street brokers.

Traditional funding sources have virtually stopped funding any commercial loans that they can't sell to the Government or to the bond market. Big financial institutions are worried about their own survival, not about making loans.

An investor or commercial property owner's best bet for a conventional loan is through community or regional banks that have a commitment to their local economies. These smaller, centralized institutions avoided most of the derivatives and the collateralized debt obligations that have disrupted the big national players. Many are still financially sound and have enough liquidity to make small to mid-sized commercial mortgage loans.
But even the community banks have tightened their standards in response to this economy.

Here is a quick list of stipulations that most conventional lenders require before they will approve and close a commercial mortgage in today's market.

Strong Sponsor / Borrower

The net-worth of the principle deal sponsors must be equal or grater than the requested loan amount. Further, the borrower must have liquidity (cash on hand), above-and-beyond any down payment, equal to about 9 months mortgage payments. They need a tri-merged credit score above 639 and will be required to demonstrate a track record of successful real estate management.

Large Down-Payment or Cash Position

Virtually no commercial mortgage loans are being written at above 75 % LTV (loan-to-value) and seller financed 2nd mortgages have been almost entirely prohibited.

Cash Flowing Property

The collateral property must generate sufficient net-operating-income to cover its own mortgage payment, separate and apart from the borrower. No land loans, no underperforming assets, no rehab or development loans. Stabilized income producing buildings with good tenants and long leases are the only property type banks are considering right now.

Good Location

Lenders are understandably avoiding economically depressed regions of the country. It is exceedingly difficult to find capital for deals in Michigan, Las Vegas, Florida or most of California. Properties will need to be in good locations in relatively strong areas.

Good Condition

Buildings will need to be well maintained and in good condition. Real estate with a-lot of deferred maintenance due will have to be repaired or upgraded before a conventional lender will consider lending against them.

These parameters will disqualify the large majority of conventional loan requests today. Now and for the foreseeable future, only the top tier will find institutional funding available to them. Loan requests that don't meet the new standards will be forced to seek privately funded loans or wait until the credit markets improve.

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