Tuesday, August 19, 2008

Commercial Mortgage Underwriting Through the Eyes of the Underwriter

This is going to look at the underwriter and the process as though it was being approached by a mortgage broker. If you are an investor in commercial property looking to get a building funded, the thinking is the same only in the 1st person.

At first some of what you read today will sound redundant, but as we move into the next couple of days I hope that we can demystify the process, and bring you up to speed on who this person behind the curtain is, and how they look at your scenario.

Commercial Mortgage Underwriting Through the Eyes of the Underwriter

Getting a borrower to approach you with a commercial mortgage loan scenario is only the 1st step in the commercial mortgage loan process. Upon your first analysis of the scenario, there are a great many combined factors that will determine if it will ever fund or close. The best borrower and the best property means nothing if due to some error, a careless mistake or a poorly put together loan package there is no closing. Equally, if not more so than residential financing, the commercial mortgage business is extremely relationship driven, particularly when talking about lenders.

An old adage is that two LO’s can bring the same deal to the same lender, and due to something that has or has not happened in the past or because of the lack of a current relationship, one will get a loan approval and one will not.

Rule 1: Always do what is in the best interest of the borrower, AND in the best interest of the lender. Happy borrowers lead to referral business, and happy lenders lead to your next viable deal getting strong consideration.

Rule 2: Always manage your borrower’s expectations when it comes to the potential rate, timing of the transaction and money that is necessary to close a loan. DO NOT tell your clients what you think that they want to hear, tell them the reality. If someone else is over-promising and can’t deliver, the borrower will be back. If for some reason they are able to get that better deal, you want to recommend what is in their best interest.

Rule 3: Do not burn bridges with a borrower and the potential referral business they might provide by jamming the wrong deal at them to make a quick dollar.

Who is the Underwriter?

The underwriter is the representative of the lender whose ultimate job it is to gauge the risk that a specific transaction possesses to go into non-performance. It is his or her job to study every aspect of the loan from the quality of the building, the income stream of that building and the quality of the borrower to determine if the loan fits into the lenders risk guidelines. In order to enhance the potential for loan approval, present the underwriter with the most complete and accurate loan package.

Some of the items they will consider includes:

  • What is the “curb appeal” of the building, or how does it look? In the event of a foreclosure, an ugly building would be harder for a lender to sell than an attractive one, increasing the risk to the bank.
  • Who are the tenants and how long are the existing leases? If the tenants leases are expiring 30 days after the loan closes, that represents more risk to the income stream of the building than a lease that expires in 3 years. What is the quality of the tenant’s? If you had a building that had Kmart as a tenant, that would have seemed very strong until they went into bankruptcy and closed locations. For a lender that had to foreclose on the property and sell it, a space that size is hard to rent out which makes the building harder to sell at the price they need to cover the defaulted loan that they made. A Home Depot with a long term lease as an anchor tenant would score more points with an underwriter than a $1 store. Like an investor in anything, a commercial mortgage lender always has to make a risk-reward judgment.
  • Who is the borrower? While the key to a commercial mortgage loan is the net operating income that the building produces, the quality of the borrower does come into play. An underwriter wants to know credit score, and whether the borrower has payment lates, particularly on mortgages. Mortgage lates will be the death knell of a loan for a majority of lenders. Again, everything is looked at by the underwriter with an eye towards the risk that a loan will present to the lender in terms of default. The greater the risk that a loan possesses, the higher the reward or interest rate that a bank will charge and the more stringent the guidelines of the loan. (i.e. an additional monthly reserve mandated for maintenance if it is felt that the borrower might not have the means if an unexpected repair came up)


  1. Where does the property inspection and due diligence report fit into your process?

  2. If you read the two entries after this one, I think that your question may be answered. If you still have any questions, let me know at exetertraining@aol.com.