What does it really mean to underwrite a commercial mortgage?

Sheridan Bibo

We recently discussed the documents required to underwrite a commercial real estate loan. Today, we will give a brief overview of underwriting, which in of itself, is a complex process that is unique to each deal. 

For your commercial mortgage broker, underwriting the deal is the process we go through understanding the loan feasibility and assess which loan product or lender will be the best choice. For a lender, underwriting is the process a loan request goes through where they are able to determine how much risk they are willing to accept. 

Initially, you will need to provide the preliminary documents on both the property and the borrower. Underwriting will begin to assess factors such as Income and Expenses, Occupancy, asset valuation, and LTV ratio and we will do a Stress Test to determine if DSCR requirements will be met as well, as well as an assessment of the takeout risk. The loan request will then be taken to possible lenders for further underwriting. 

Throughout the loan underwriting process, we may ask you questions about numerous aspects of the transaction, including your personal financial information, the property, your investment strategy and your experience within the subset of real estate investment that you work in. This information will be presented to lenders as they evaluate the deal and move through the underwriting and approval process. 

This process depends greatly on the institution itself. Within each lending institution, there is usually a certain person assigned to each loan stage and element. We will often work with each department to ensure your loan request is best represented and the terms the lender provides are favorable.

Some loan products, such as HUD loans, have specific underwriting parameters that can affect your NOI. For example, if you have above-market rents creating a strong cash flow, allowing you to cover DSCR requirements for a larger loan amount, your lender may lower these rents to market rates and it will affect the overall loan approval. 

It is our job as a broker to predict and remedy these occurrences. An efficient, effective underwriting process is the best way to ensure deals close on time and your loan request can be met.