AS A RULE OF THUMB, BANKS TYPICALLY EXPECT BORROWERS TO HAVE LIQUID ASSETS EQUAL TO AROUND 10% OF THE LOAN AMOUNT AVAILABLE.
#3
Liquidity Requirements
#4
Experience in Real Estate
In addition to the down payment, commercial banks often require borrowers to have a certain level of liquidity on hand. This ensures that the borrower can cover unexpected costs, such as repairs, vacancies, or other financial setbacks, during the loan’s term. As a rule of thumb, banks typically expect borrowers to have liquid assets equal to around 10% of the loan amount available. This liquidity requirement helps mitigate the risk of default in the event of unforeseen issues that might impact the property’s cash flow. For example, if you are securing a $5 million loan, you might need to have $500,000 in liquid reserves, such as cash, stocks, or other easily accessible assets. Having sufficient liquidity demonstrates financial stability and reassures lenders that you can manage the property effectively.
Commercial lenders place significant importance on the borrower’s experience in real estate investment, particularly when dealing with multifamily properties. Lenders are more likely to approve a loan for an investor with a proven track record of managing similar properties successfully. This includes experience in acquiring, managing, and operating apartment buildings. If you’re a new investor, banks may still lend to you, but you might need to bring on a more experienced co-investor or property manager to strengthen your application. Lenders will also evaluate the level of management expertise you have in place for the property. Having a reputable property manager or management company can be a key factor in getting the loan approved.
#5 Creditworthiness and Debt Service Coverage Ratio (DSCR)
Your credit score is another critical element in securing a commercial mortgage. While commercial loans are generally based more on the property’s income potential than on the borrower’s personal credit, a strong credit score still plays a role in determining the loan’s interest rate and terms. Most banks prefer borrowers with a credit score of at least 680, though higher scores may be required for larger loans or more competitive terms. Another important factor is the Debt Service Coverage Ratio (DSCR), which measures a property’s ability to cover its debt payments. Banks typically look for a DSCR of 1.20 or higher, meaning the property generates at least 20% more income than is required to cover debt payments. A higher DSCR indicates that the property is more likely to generate consistent cash flow, which reduces the risk for the lender.
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