There are a large number of both bank, and non-bank lenders, willing to make loans at a price, the price being the interest rate that is charged. One of the most important factors in determining the interest rate is the financial strength of the borrower.
Financial strength is often shown as the difference between the amount of money that the borrower is making and the amount of money that the borrower is spending. This is known as the Debt Coverage Ratio.
Determining financial strength is typically done by reviewing the borrower’s tax returns, personal financial statement and credit report as well as related documents as needed. From this information the borrower’s “Cash Flow” can be determined. Please note that unreported income is not likely to be counted.
A loan with an extremely financially strong borrower and a good multi use property in a non-blighted major metropolitan area can get an interest rate today (depending upon the terms of the loan) that will most likely never be seen again for decades.
If a borrower has bad credit and especially if there has been a foreclosure the opportunity to get a good loan is limited. Some banks will consider these loans if there is a good story behind the financial difficulties with the borrower doing his best to pay back his obligations. However that borrower had best be currently making money and don’t expect the best interest rate compared to other commercial lender.
The lenders that work with people who either have bad credit or do not show enough cash flow (via tax returns) to cover the monthly payment are known as private money lenders. These lenders make loans based on the loan amount as compared to value of the property. This is known as collateral lending and due to perceived risk the interest rates are much higher than cash flow lending.
Most people have the financial strength somewhere between a strong and a weak borrower and have no idea of the type of loan that they are qualified for. Furthermore everyone wants the best rate and terms possible.
Where the desire to get the best loan possible becomes a problem is when a borrower thinks that the terms that he can get are better than what he actually can get. This misconception can lead to massive amounts of wasted time working on deal s that never have a chance to happen and broken escrows.
As a real estate professional who basically sells your time and expertise it is important to know what type of borrower you have.
So how do you find out what type of borrower you have?
At the very beginning of the sales process insist that you buyers put together the following information:
With this information you would have a very good start in determining what type of loan that your borrower would qualify for. This will allow you to set the appropriate expectations and avoid headaches during the lending process.
Contact Bill Hand to learn more about Debt Coverage Service Ratio and how it applies to commercial real estate financing.
Bill Hand
Pacific West CDC
415-221-4263
bhand@pacwestcdc.com
Financial strength is often shown as the difference between the amount of money that the borrower is making and the amount of money that the borrower is spending. This is known as the Debt Coverage Ratio.
Determining financial strength is typically done by reviewing the borrower’s tax returns, personal financial statement and credit report as well as related documents as needed. From this information the borrower’s “Cash Flow” can be determined. Please note that unreported income is not likely to be counted.
A loan with an extremely financially strong borrower and a good multi use property in a non-blighted major metropolitan area can get an interest rate today (depending upon the terms of the loan) that will most likely never be seen again for decades.
If a borrower has bad credit and especially if there has been a foreclosure the opportunity to get a good loan is limited. Some banks will consider these loans if there is a good story behind the financial difficulties with the borrower doing his best to pay back his obligations. However that borrower had best be currently making money and don’t expect the best interest rate compared to other commercial lender.
The lenders that work with people who either have bad credit or do not show enough cash flow (via tax returns) to cover the monthly payment are known as private money lenders. These lenders make loans based on the loan amount as compared to value of the property. This is known as collateral lending and due to perceived risk the interest rates are much higher than cash flow lending.
Most people have the financial strength somewhere between a strong and a weak borrower and have no idea of the type of loan that they are qualified for. Furthermore everyone wants the best rate and terms possible.
Where the desire to get the best loan possible becomes a problem is when a borrower thinks that the terms that he can get are better than what he actually can get. This misconception can lead to massive amounts of wasted time working on deal s that never have a chance to happen and broken escrows.
As a real estate professional who basically sells your time and expertise it is important to know what type of borrower you have.
So how do you find out what type of borrower you have?
At the very beginning of the sales process insist that you buyers put together the following information:
- Last three years tax returns, both business and personal complete with all schedules and company provided K-1’s.
- Please fill out a financial statement that is very similar to what I have attached.
- A copy of their credit report that shows the borrowers continuing obligations as well as their credit report.
With this information you would have a very good start in determining what type of loan that your borrower would qualify for. This will allow you to set the appropriate expectations and avoid headaches during the lending process.
Contact Bill Hand to learn more about Debt Coverage Service Ratio and how it applies to commercial real estate financing.
Bill Hand
Pacific West CDC
415-221-4263
bhand@pacwestcdc.com
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