Home Loan Underwriting Process

Understanding the home loan underwriting process may help you to better understand how you can get a better loan or refinance to a better rate.

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 Since the process of underwriting a real estate loan requests is similar in many respects from bank to bank, it may be helpful to potential borrowers to learn the basic considerations of Bank Lenders when reviewing such a loan request:

Stability Of The Borrower
This is one of the most important aspects of real estate lending. Borrowers must have a solid credit standing, a proven track record and an adequate support staff. In addition to projecting the cash flow to be generated from the project under consideration, cash flows of the borrower's other projects will be reviewed in detail to determine if the borrower can meet all of its obligations.

Property Valuation
An appraisal conforming to current regulatory requirements, and prepared by an appraiser acceptable to the bank, will be required. It is possible to have a loan request approved based upon the bank's internal analysis without a written appraisal, but such an approval would be conditioned upon an acceptable review of an appraisal prior to closing. As a matter of policy, and now as a matter of regulatory compliance, banks are generally limited to a maximum loan-to-value ratio of 85%.

Property Condition
The physical aspects of a project are reviewed in accordance with the bank's inspection checklist. The bank will estimate the remaining economic life of the property improvements and evaluate functional obsolescence. Accessibility, parking ratios and compatibility of immediately surrounding properties will also be assessed. Finally, environmental issues (hazardous materials, wetlands, etc.) will be researched, with reliance upon independent environmental assessments where necessary.

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Project Economics
The bank will review historical and/or performance income/expense statements for the property supported by current rent rolls and copies of all leases. Leases will be read carefully for terms and conditions, and the financial condition of major tenants will be evaluated.

Of particular importance are lease items such as rent concessions, performance clauses and exit clauses. Upon determining the Net Operating Income (NOI) of a project, which is the projected income to be generated after operating expenses, the debt service coverage ratio is calculated (NOl/annual principal and interest payments). Typically, the debt service coverage ratio of a project should be 1.2 to 1 or greater to be approved.

Market Analysis
A thorough review of the project's market area will be conducted by the bank to include defining the market area and comparing the project to competitive properties. Demographic trends will be analyzed and contrasted to the project's position within the marketplace, and a determination will be made as to the balance of the market's economic supply and demand.

As you can see, the underwriting process is thorough and, therefore, time consuming. So please have patience when your bank is reviewing your next loan request. These guidelines are for commercial loans, however, much of this applies to residential properties, especially if you own a 2-4 unit or multi-family property.

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