Underwriting is the process of lenders determining if borrowers meet certain criteria by examining their credit, capacity, and collateral (the 3 Cs). When it comes to commercial real estate, lenders will also examine a borrower’s experience with owning and managing similar properties as part of their underwriting process.

Sources:

• HUD 223(a)(7) Loan Underwriting Definition
• Underwriting and the HUD 223(f) Loan Program

When underwriting a commercial real estate loan, lenders will consider several factors, including the purpose of the loan, the borrower's creditworthiness, the collateral, and the loan-to-value ratio. Additionally, lenders will require certain documents to be prepared for the loan application, such as business tax returns, financial reports, bank statements, information on collateral, a third-party appraisal of the investment property, and a business plan and strategy. For more information on the top 10 tax benefits of investing in commercial real estate, please see this article.

The key considerations for underwriting a commercial real estate loan are the 5 Cs of credit: credit history, current level of debt, capacity to take on more debt, collateral offered, and character. Additionally, lenders will want to see evidence that you have a solid plan in place for how you intend to use the property and generate income from it. They will also want to see proof that you have the financial resources in place to make a down payment and cover closing costs. Having a well-thought-out business plan is also crucial.

For more information, see What You Need to Know Before Applying for a Commercial Real Estate Loan and our Debt Service Coverage Ratio Calculator.

When underwriting a commercial real estate loan, lenders will consider a variety of factors, such as the purpose of the loan, the borrower's creditworthiness, the collateral, and the documents prepared for the loan application. The risks associated with underwriting a commercial real estate loan include the potential for default on the loan, the potential for the borrower to be unable to make payments, and the potential for the property to decrease in value. Additionally, lenders may be exposed to legal risks if the loan documents are not properly prepared or if the loan is not properly secured.

Underwriting a commercial real estate loan can provide many benefits, such as access to capital, lower interest rates, and longer repayment terms. Additionally, lenders may offer more flexible terms and conditions, such as allowing for a higher loan-to-value ratio or a lower debt-service coverage ratio. This can help borrowers secure a loan that meets their needs and goals. Furthermore, lenders may also provide additional services, such as financial advice and guidance, to help borrowers make the best decisions for their business. Finally, lenders may also offer tax benefits, such as deductions for interest payments, which can help borrowers save money in the long run. For more information on the tax benefits of investing in commercial real estate, please see this article.

Underwriting a commercial real estate loan differs from underwriting a residential loan in several ways. Commercial real estate loans tend to have higher interest rates and require larger down payments, and they also tend to have more stringent credit requirements. This is because commercial properties are generally considered to be a higher risk for lenders. Residential real estate loans, on the other hand, tend to have lower interest rates and may require smaller down payments, making them more accessible to individual investors.