One of the most important decisions a small-balance commercial mortgage lender needs to make during the underwriting process is the loan-to-value (LTV) percentage for which your borrower qualifies. The LTV is the ratio of the loan amount to the value of the property, and both your borrower and your building have a hand in determining the percentage.
Here are some crucial factors that will affect your borrower’s LTV:
The higher your borrower’s credit score, the more likely they are to be offered a higher LTV. Borrowers with better credit histories are seen as less of a risk for lenders because they’ve shown their ability to repay their debts.
The LTV for which your borrower can qualify can also be affected by the kind of building they own. Certain commercial properties, like auto repair shops or industrial buildings, are generally considered riskier by lenders, so borrowers seeking financing for them are offered lower LTVs. Properties seen as less risky, like mixed-use or apartment buildings, can typically qualify for a higher LTV.
Location of the property:
Another factor in determining LTV will be the location of your borrower’s building. Urban, suburban and rural locations all have various pros and cons, and your lender will take these into account when underwriting the mortgage.
Condition of the building:
The upkeep of your borrower’s property is another element that will be considered by the lender. If your borrower’s property is well-maintained, it shows lenders that the borrower is invested in the property. This could lead to a higher LTV.
Cash flow of the building:
The cash flow of your borrower’s property is one of the most important metrics many small-balance commercial mortgage lenders use to determine a borrower’s capacity to pay. The better the building’s cash flow, the more likely your borrower is to be offered a higher LTV.
It’s important to remember that all of the above components are important and all work together to determine the LTV, and therefore loan amount, for which your borrower can qualify. Make sure to emphasize your borrower’s strengths when discussing the deal with your lender and account for weak spots. Be sure to discuss all of the above information with your borrower so that you can send their request to the right lender and get the best deal possible.