The credit crisis, which is fallout from the subprime housing debacle, essentially shut down mortgage lending and other loans critical for real estate sales and refinancing in 2009. Commercial banks are watching delinquencies increase and vacancies continue to rise, and are tightening their credit requirements.
Most lenders use a measurement called Debt Coverage Ratio (DCR) to determine how much money they will lend on a property. Debt coverage ratio measures the property’s ability to generate enough cash to cover the monthly debt payments. In the past lenders requirements were around 1:1 but now are being increased to closer to 1:3 to 1:35 coverage. This means if the income from the property is not sufficient enough to cover the DCR; the borrower will have to put down a larger down payment upfront when purchasing the property.
Mark Cusick, a Commercial Loan Officer with Commercial Lending Group, is seeing lender’s require the following items from individuals:
- Net worth equal to or greater than the loan amount requested
- Cash after closing equal to or greater than one year of principal and interest payments
- Borrower’s personal cash flow must carry their own debt load. Lenders want to know that the borrower will not need to supplement their personal cash flow from the properties cash flow
- Strong ownership and management experience will help offset potential weakness in Items 1-3
Now more than ever a knowledgeable Real Estate Broker can make the difference in your real estate transaction. You need a trusted advisor on your side guiding you along the way!
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