If you think mortgages are only for home loans, think again. They are more important while financing of commercial real estate projects. The Comercial Mortgage loans are debts secured by potential or current property owner. This loan can be on recourse or non-recourse basis. This is done in order to finance a new purchase or refinance a property. When the person gets a lucrative deal on the loan with attractive interest rates, it is seen as an investment yield of the companies real estate. This deal reduces the investors equity in the project, reduces the risk and hence it allows more liquidity of investors capital for future launch. When you find the perfect investor like this one, it’s a jackpot. For with the lucrative rates the debtor can make sure his cost of debt is less than the returns he will gen on investment, i.e. he is not undertaking a daredevil risk, and it’s a more justified risk, a necessity.
Now the process of getting commercial mortgage loan requires the lender qualifying the property and the borrower to determine the financial strength and capacity to pay back the debt. The people who lend the money are not in the business to cheat, they are actually interested in generating activeinterest in the money they have given the debtor and the interest they are scheduled to receive.
This crosschecking is called underwriting and the financial validity the project is judged. This includes potential gross income, down to the effective gross income and property expenditure. All the recurring cost to manage the property is also included to derive a representative net operating income.
For the lenders, it is important that the rel estate supports the debt. This aspet is analyzed and the debt service coverage ratio is calculated as NOI/debt. This s used to determine if the minimum acceptable range of 1.20:1 for multifamily and 1.25:1 for other commercial purposes are met. Although this amount is changeable when we consider factors like how the loan is priced and the investor profile variables which increases or decreased the risk quotient attributed to the project.
The underwriting process is the one that clears the doubt that may rise for both the parties. It is the agreement that checks the benefits for both the partis and ensures that neither is in any intentional loss. The factors that one has to consider for the undertaking process are borrowers financial strength, investors experienceand the credit profile. These three points covers the base for both the partes and ensure that everyone gets the fair deal.
The net worth of the borrower, their other commercial real estate holdings, liquidity etc. is factored in the decision of the request approval, disapproval or modification due to the associative risks. When you think from the lenders perspective, it is clear that he tries to mitigate the risk along with charging a risk premium as need be. They will still fund the loan when all underwriting criteria are met. This way they ensure that they are not at lose.
Commercial mortgage loans are a very possible option for borrower to control their capital supplemented debt secured elsewhere to fund acquisitions and refinancing. This way the borrower ensures that their interest is secured.
In the event that appropriate leverage is used, the probability gets a boost to say the least. All these factors add up in creating a suitable environment for the borrower and the lender leading to a smooth transaction. One has to realize that the perfect balance has to achieve for the fair transaction. It shouldn’t happen that the profits are skewed towards the lender with the borrower lamenting his folly.
It is not all cheery in the trade if a single leverage goes off path. One leverage can erode all the profits. It is the lenders who usually request properties and borrowers financials to facilitate the decision of the request being plausible. They use this information about the borrower to price their loans and other factors. For this to happen smoothly, it is but natural that the shared information has to be transparent with no hidden meanings. When the lender sees that the borrower is clear in his dealings the process is quickened. On a different note, transparency in dealings gives a boost to the lender borrower relationships. The lenders are in business of giving out money but that is not a social service. They need assurance that the money is not squandered needlessly and that the deal is strong enough to make good in case of borrower delinquency.
The best way to look at the deal is to understand that neither of the party aims to create trouble for the other. When the borrower and the lender are on par about the terms, the process of getting the loans approved is multiplied. The lender has some concerns and the borrower should be able to convince the lender that it is overall a good deal.
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