Through the Eyes of the Commercial Mortgage Underwriter

Dealing with the underwriter is one of the most critical parts of getting this loan funded. Let’s take a look.

Getting a borrower to approach you with a commercial mortgage loan scenario is only the first step in the commercial mortgage loan process. Upon your first analysis, there are a great many combined factors that will determine if it will ever fund or close.

The best borrower and the best property mean nothing if (because of some error, careless mistake, or a poorly prepared loan package) there is no closing. As with residential financing–if not even more so, the commercial mortgage business is relationship driven, particularly when talking about lenders.

Two loan officers can bring the same deal to the same lender, and because of some circumstance 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 the money 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 of a specific transaction has to go into non-performance. It is his or her job to study every aspect of the loan from the quality of the building, income stream, 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, you need present the underwriter with the most complete and accurate loan package. Some of the items they will consider include:

Curb appeal

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 leases that expires in three years.

What is the quality of the tenants? 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 foreclosed 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. A Home Depot with a long-term lease as an anchor tenant would score more points than a dollar store. Like any investor, a commercial mortgage lender has to make a risk/reward judgment.

The borrower

Who is the borrower? While the key to a commercial mortgage loan is the net operating income 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, the underwriter looks at everything with an eye towards the risk a loan will present to the lender in terms of default. The greater the risk a loan possesses, the higher the reward or interest rate a bank will charge, and the more stringent the guidelines of the loan.

Commercial mortgage underwriting is done on a case-by-case basis because every borrower and property creates a unique situation. Remember that with commercial borrowers, there are typically stories that need to be told, whether it concerns the building, the borrower, or both.

It is the commercial property investor or loan officer’s ability to communicate the story effectively, and the willingness of the underwriter to listen with an open mind that matters. These are things that can spell the difference between the successful funding of a scenario versus the death of the deal.

Most important criteria: debt service coverage

When an underwriter is examining a building, one of the first questions that need to be answered is:

Does this building’s income service the loan amount with an appropriate level of debt service coverage?

In other words, what is the debt service coverage ration of this property given the building’s current Net Operating Income (NOI)? It sounds like a complicated analysis, but it really isn’t.

Gross rents – operating expenses = NOI

The operating expenses include property taxes, building insurance, building utilities, 5% of gross rents for vacancy, and 5% of gross rents for management of the building.

If at first glance, you do not have all of the expense figures, a ballpark way to determine NOI is to take 1/3 off the gross rents, and the remainder will give a very raw NOI number. This number should not be used with the underwriter, but to do a quick attempt to determine debt service coverage (DSCR).

To determine the DSCR the underwriter will use the following formula:

Yearly NOI / Total yearly principal and interest payments for the loan amount at a given interest rate and amortization period

The typical minimum level for debt service coverage is:

  • 1.2x for multifamily property’s

  • 1.25x for other commercial property types

Once the underwriter looks at the result and determines that the number is at a high enough level–case closed and loan approved. Right?


It is now the underwriter’s job to take what (on the surface) seems to be solid financial information and get down into the numbers to verify the integrity and accuracy of that information.

Rule 4:
Do not embellish rent numbers or minimize expense numbers to make a scenario work. An underwriter, whose job it is to catch it, will catch it. The net result will be a rejected loan and the loss of any relationship with that lender.

As a side note, consider the risk/reward thinking that goes into a lenders decision based on DSCR. All things being equal, what represents a more attractive loan scenario, strictly according to DSCR:

1.25x coverage or the same building at a 1.35x coverage. Sounds simplistic, but of course the higher coverage is better because it provides more of a cushion for the borrower who has to pay the debt service and creates a better situation for the lender in the event they have to foreclose and sell the building.

Loan amount vs. LTV

Loan to value (or LTV), is not a term that a commercial underwriter really considers when making a determination on the dollar amount of a loan that will be offered for a purchase or a refinance. The key determination is going to be how the income of that building will service the debt of a certain loan amount.

Of course, other factors, such as an outside appraisal, come into play when an underwriter is calculating loan amount; DSCR is going to be the key number. Without a coverage ratio at an acceptable level, the other factors become irrelevant.

For the underwriter, as well as for the investor or borrower to get some idea of the value of the building and whether it has a good chance to appraise at an appropriate value, the capitalization rate for the given area can be used in conjunction with the NOI of the building. Simply use the following calculation:

NOI / capitalization rate will give you a ballpark value for the building, as long as the two numbers are accurate.

Rule 5:
Most, if not all lenders are going to require an appraisal by an independent firm from the lenders approved list. Getting an appraisal up front before speaking to the lender can be a waste of time and money. Of the different methods that an appraiser will use to calculate the value of a property, the income approach is the key method.

Paperwork preparation–the loan package

Remember, in the beginning we talked about the importance of putting your best foot forward when applying for a loan either for yourself or for a borrower. We talked about having one chance to make a good first impression on the underwriter.

The first step is to know the situation as well as possible, so that potential surprises can be avoided (although they will inevitably arise). The second is to make sure that the numbers seem to work for the building, as well as the borrower, so as not to waste the lenders and underwriters time with scenarios that have absolutely no possibility of getting funded.

If the minimum credit score for the lender is 600, don’t bring a borrower with a 520 that has no stronger guarantor. If the minimum DSCR for a given building type at that lender is 1.25x, don’t waste their time with a building and loan amount that will result in a DSCR of 1.05x.

While exceptions can be asked for and sometimes granted for aspects of a loan that might not fit the lender’s specific criteria, use common sense underwriting when looking at a potential scenario.

Ultimately, you want the underwriter to be happy to hear from you because they know that the loan scenario you are bringing them is viable, not a complete waste of their time.

Not every viable commercial mortgage loan scenario will get funded, since a wide variety of stumbling blocks can come up unexpectedly throughout the process. The key is to know your scenario inside and out and build a strong base which will lead to a strong loan package.

Rule 6:
As in anything, a weak foundation or base for a loan package will lead to a relatively high probability of the loan not getting funded because it will never get through underwriting.

General documents required

What paperwork should you be prepared with to provide to the underwriter?

  • 1003 or loan application
  • Credit Report with FICO score (and explanations for any derogatory credit)
  • Two years personal tax returns (for a full documentation loan)
  • Two years of property tax returns
  • Property income and expense statement
  • Digital pictures of the property
  • Copies of current leases and rent roll
  • Schedule of other owned real estate
  • Contract of sale for a purchase
  • Copy of insurance and utility bills for the building
  • Current mortgagor information for a refinance
  • Agreement to subordinate to a new first mortgage loan if a current subordinate mortgagor exists in a refinance


The underwriter is going to assimilate all of the paperwork provided and make a determination on its validity and accuracy. If everything is found to fit into the lenders parameters and risk tolerances, a letter of interest (LOI) will be given to the borrower. The interest rate and loan amount will be at a level commensurate with the DSCR and perceived risk of borrower and building.

The relationship that you will have with the underwriter on the one hand needs to be professional and hopefully congenial, but understand that first and foremost, they are there to protect the interests of the lender.

Exceptions on a specific building or borrower will be made only if it can be completely and satisfactorily explained to the lenders satisfaction.

If all of the steps are followed correctly and accurately, your loan will have the best chance of passing muster and getting ultimate approval. Commercial mortgage financing can be frustrating due to the nuances and potential pitfalls, but can be well worth the effort.

Final Rule:
Know your lenders and know each the type of financing that they do. Never attempt to shove a loan that is not even close to the lending criteria that lender looks for. Much of the process comes down to the building to be funded, to the borrower, and to the credibility of the person presenting the loan package to the lender.

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