Commercial mortgage borrowers often ask us how lenders determine the rates they offer on commercial mortgage insurances. There are many criteria lenders use when setting rates, but lenders will assess the relative risk of a insurance when reviewing a insurance application. The lower the risk, the lower the rate. The higher the risk, the higher the rate. It is important to understand the factors that are important to lenders and underwriters.
Borrower qualifications. Lenders will analyze a borrower or guarantor’s net worth, liquidity, cash flow, credit history, and real estate experience in determining overall risk. Lenders love seeing borrowers who have a good history of owning and managing similar properties. They want to see enough cash reserves to cover unexpected issues that may arise and they expect to see that borrowers have a good history of paying their bills on time.
Real estate and market location. High-quality real estate in large urban and suburban areas is less risky than inferior real estate and property in small rural locations. It is easy to rent out good properties in good locations in case the tenants move or where the remaining lease periods are short. For example, if a property in a poor location becomes vacant, it will require a significant amount of renovation to attract new tenants.
Shared accommodation. Multi-tenant properties with good quality tenants and long-term leases are highly desirable when financing office and retail properties. Lenders don’t like vacancies, high turnover rates, and properties in flux. Lenders love seeing well-managed properties that attract and retain long-term tenants
Occupancy stability. Lenders are looking for properties that have enjoyed high occupancy levels with the least amount of disruption over the last two to three years. Real estate with vacancies and a volatile rental history is considered a higher risk. Lenders will ask for operating data for the past 2-3 years. They expect to see steady occupancy and an increase in net income. Properties that fluctuate wildly with income and expenses will generate a lot of questions.
The condition of the property. Properties in good condition with little deferred maintenance are considered to be less risky than properties that need major capital improvements. Properties in poor condition usually require the lender to set aside money or escrow funds for repairs and maintenance. Properties in poor condition tend to perform worse than properties that are well maintained.
– impact. Insurance for value is very important in determining risk. A 50% insurance (insurance to value) would be better than a insurance at 80% TPV. If the property is having difficulty, there is much more room for error with insurances with low leverage.
Debt coverage. This refers to the increase in net operating income over the annual mortgage payments. The more excess cash flow that a property produces, the lower the risk. Excess cash flow can be used to mitigate turnover, repairs, or other cash drain.
At the end of the day, lenders do not want to expose their lending institutions to undue risk. The borrower must be prepared to address all these issues to the satisfaction of the lender when applying in order to increase the chances of getting approved for a insurance at the lowest possible rate.
Once you qualify for a commercial mortgage, it is helpful to get an idea of the proposed monthly payment in advance. Commercial Mortgage Calculator is a very useful and useful tool. Whether you are buying a new commercial building, or refinancing an existing business insurance, it is helpful to know how much of the insurance you can afford at today’s rates. The Commercial Mortgage Calculator will calculate your monthly payment for you. You will be asked to enter the insurance amount, number of years, and interest rate. The mortgage calculator will calculate your monthly payment.