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Commercial Loan Underwriting Basics

Increase in cash flow is $1,835 per month or $22,028 annual. Essentially, from a cash flow perspective, the borrower would recoup the costs of loan in less than one year, despite the rate increase by 75 basis points. Although the borrower would have to pay for the appraisal and environmental report upfront, they would be “refunded” for these costs at close if Commercial Caveat Finance.

In our experience most business owners would be very interested in pursuing the proposed refinance.

Example 2. Investment Property, 10 Unit Retail Center.

Borrower has owned the property for 7 years and has two loans on the subject property. First loan is a conventional floating rate loan that adjusts annually, amortized over 25 years and the second is seller held. It is amortized over 20 years and has a fixed 20 year rate. Neither loan has a balloon provision; however the first loan does have a prepayment penalty of 5% of the remaining loan balance, which is in effect for 3 more years.

Property Current Value – 9% Cap $2,600,000 (Purchase for $2,300,000)

Combined Current Loan Balance $1,635,000

Original Loan Balance, 1st $1,610,000 (70% Loan to Value)

Original Loan Balance, 2nd $230,000 (10% Loan to Value)

Current Loan to Value 61%

Interest Rate, 1st 6.65%

Interest Rate, 2nd 7%

Current Debt Coverage Ratio 1.27

Net Operating Income $235,000

Combined Monthly Payment $15,448

Proposed Loan – 10 year fixed, 30 year amortization. Borrower is planning on combining the two loans together and wants the security of having a fixed rate loan. Borrower also wants to roll in as much of the closing costs as possible into the loan amount to reduce “out of pocket” cash.

Property Value – 9% Cap $2,600,000

Combined Current Loan Balance $1,635,000

Closing Costs $83,500 *

Proposed Loan Amount 1,735,568

Proposed Loan to Value 67%

Interest Rate 7.5%

Current Debt Coverage Ratio 1.54

Net Operating Income $235,000

Monthly Payment $12,743

Closing Cost Break Down (Pre Pay $72,500 [5% of 1st loan amount], Title at $3000, Lender Legal Fees at $2,200, Origination Fee at 1% or $17,185, Appraisal $4,000, Environmental $1,800) .

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