Commercial Magazine

Make the Underwriter Happy

Include these essential details in every commercial mortgage application

By Stephen Sobin

Underwriters and their credit analysts receive many more commercial mortgage applications each week than they can possibly approve. Experienced mortgage brokers can increase their chances of success by preparing a complete loan file that addresses the underwriter’s major concerns upfront in a short and easily understood summary.

But how do underwriters decide which loans to approve and which loans to reject? What are the hot-button issues to be considered when reviewing a commercial mortgage request?

Many loans that could otherwise be approved get pushed aside if the loan-submission package is not prepared properly. Underwriters don’t have the time to weed through stacks of useless forms and documents to understand the loan request. For the best chance of success, commercial mortgage brokers will ask the right questions of their clients upfront. Also, nearly every application should contain certain essential information.

A borrower’s credit score is usually an essential detail. The applicant will typically need to have a good credit rating. The government-sponsored enterprises Fannie Mae and Freddie Mac expect a credit score of 680 or better, and each lender will have different credit requirements. 

You should know your borrower’s credit score upfront and be prepared to discuss and explain any and all credit delinquencies, foreclosures, short sales, bankruptcies, judgments, etc. Underwriters do not like surprises or brokers who try to hide information. Furthermore, lenders will often overlook delinquent credit when there is an acceptable explanation and compensating factors, provided that they understand the issues upfront.

Many loans that could otherwise be approved get pushed aside if the loan-submission package is not prepared properly.

About the borrower

The borrower’s net worth and liquidity is another key factor. Lenders typically have minimum requirements on both counts. Normally, borrowers must have a minimum net worth equal to the loan amount and cash liquidity that is equivalent to six to nine months of proposed mortgage payments.  

The underwriter wants to see that a borrower has a net worth that is sufficient to cover a personal guarantee or a carve-out guarantee that secures the loan. The borrower typically needs to have the financial wherewithal to stand behind his or her guarantee. Likewise, lenders do not want to see a borrower use all of their available cash liquidity as the downpayment for a purchase. Lenders expect to see sufficient cash reserves to handle unexpected expenses that may arise.

The borrower’s experience is another key factor. Has the sponsor or other investors owned or managed a similar asset in the same neighborhood, city or state? Lenders are wary of first-time borrowers with no related experience in that particular market. Many borrowers look to buy properties far from home in markets where they have no experience. These deals are hard for lenders to approve.

The demographics of the area in question also is important. A lender will consider whether the property is located in a rural, suburban or urban market. Is it a growing and active neighborhood, or is it stagnating and declining? What is the population of the market? The location and market size are important issues for underwriters.

Before submitting a loan application to a lender, make sure you understand the lender’s geographic preferences. In rural locations, the area should exhibit a diverse employment and economic base. Lenders favor areas with multiple key employers rather than a single one. Can the neighborhood support the closing of a local factory or military base? Many small towns suffer severe economic downturns if the only employment source relocates or closes up shop.

Property conditions

Another important consideration is the property’s condition. An underwriter will want to know if the property was recently renovated and is in good condition, or if it needs major rehabilitation and suffers from deferred maintenance. Another consideration is whether the property generates cash flow in its current condition, or is vacant and in need of a capital investment.

The remaining useful life of the property is another major consideration. Many banks and institutional lenders today prefer to lend on income-producing and cash-flowing properties. Properties in need of repair, or properties that are not generating much income, can obtain financing from nontraditional sources. Currently, there are countless private lenders, bridge lenders and debt funds that are actively making short-term loans to experienced borrowers for renovation, fix-and-flip and repositioning purposes.

Commercial mortgage lenders are concerned about environmental risks and require a Phase I environmental site assessment on virtually all loans. If any potential problems emerge from the Phase I report, the lender will likely require a Phase II report and a remediation plan. Lenders want to know, for example, if the property is near a gas station, dry cleaner, or a heavy industrial or manufacturing plant. If you suspect any possible environmental problems, your client should investigate these fully so you can report any findings to the underwriter.

Also, make time to review the rent rolls upfront. The underwriter will want to see various details about the current occupancy. This starts with whether there are any vacancies, as well as how long the tenants have occupied the space and been in business. Underwriters will typically have a number of questions about the tenants. Do any of them report sales figures or provide financial statements? Are they large companies or small mom-and-pop shops? 

The lease terms are another important factor. The time left on the leases and other details about these agreements should be spelled out in a lease abstract summary. Obviously, each type of property will require a different analysis. Apartment lenders may only care about current occupancy rates. Meanwhile, lenders could require a much more detailed analysis of a retail property, as certain types of traditional retail have struggled. 

Likewise, you should carefully review the income-and-expense statement. The anticipated income should match the actual income reflected on the rent roll. Be aware of any discrepancies between these two forms. Is the property showing positive operating performance with no material declines in revenue or net operating income? Does the operating statement indicate high vacancy rates that were not disclosed elsewhere? Review the expenses. They should be appropriate for a property of that size. These costs should include fees for management, vacancy and repairs. Underwriters will include allowances for these expenses.

You should carefully review the net operating income figures. The income should be sufficient to service the proposed debt. The debt service relative to the net income also is of high importance to underwriters. Many lenders will require that the net income exceeds the debt coverage by 25% for commercial properties or by 20% for apartments. 

Lastly, compliance is another major area of concern. The property should conform with all applicable zoning requirements and have a valid certificate of occupancy for the intended use. If the certificate of occupancy states that the property is a legal 10-unit apartment, for example, but the rent roll shows 12 units, the lender might not be able to use all of the reported income on the application. Many landlords rent out basement space, attic space or other units that do not conform with local ordinances. Lenders will typically disallow the income from these units.

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Presenting a loan package to a lender for a quick approval takes a fair amount of work upfront. Commercial mortgage brokers who take the time to completely analyze and prepare a submission in advance, however, find that their loan applications have a higher chance of approval and are rewarded with faster turnaround times. 

Take the time upfront to ask the right questions. It may eliminate weeks or months of processing time on a loan that might not close. Lenders also will appreciate your diligence and will look forward to receiving your submissions. 


  • Stephen Sobin

    Stephen A. Sobin is the founder and president of Select Commercial Funding LLC, a nationwide commercial mortgage brokerage company. An industry veteran with more than 35 years of mortgage lending experience, Sobin is a proud member of the InterCapital Group, a nationwide alliance of commercial mortgage professionals. Reach Sobin at (516) 596-8537 or visit

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