The Lending Equation

Published on March 3, 2019

The Lending Equation

Common Sense Commercial Loan Criteria

Character. This is demonstrated by credit and most recently, credit score. Have you paid your bills in the past? Judgements? Percent debt against credit lines greater than 30%?

Capacity to Repay. This refers to the actual ability of the borrower to repay the debt and how this will be done. This can be from the earnings from a business, cash flow from the investment property, or, the sale of the investment property. It could even be a forward commitment from a long-term lender in the case of the initial loan being short term.

Collateral. Collateral is what will be liquidated should the borrower not pay the loan when due. Note: the lender requires a margin above the loan amount to cover collection costs should it come to that.

Liquidity.  This is what the lender considers “Plan B”. In case the primary means of payback fails, you need at least “interest carry” in the bank until the situation is corrected. NOTE: this can also be satisfied in some cases by stable and substantial earnings of the borrow. Either from his/her “day job” or proven by historical tax returns where assuring the continuity.

“Skin in the deal”. The lender wants to make sure the borrower is taking great care of the collateral, doing everything possible to assure the project’s success. There is no better way assure this than the borrower’s hard cash investment in the project/property/collateral.

Conclusion: Whether a hard money loan, conventional, conforming loan, hybrid or alternate conforming loan, one or more of the above “always” come into pay. When the loan is reviewed by the lender, the transaction must make sense. Some new investors have been taught there is 100% hard money available. It does not fit into the equation since it costs 35% of the asset value to foreclose for non-payment. Thus, the maximum loan to value is 65%. Make sense?

If one of the above is weak, a strong “other” may compensate making for a loan approval, again, make sense?

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