So what’s required to get a commercial loan? Sometimes it can be confusing because you hear different standards about liquidity requirements or what you have to have in order to qualify.
In the multifamily world, commercial lending generally applies once you are dealing with properties that are five units or more. And while there are some common standards across the industry, it is important to understand that many of these loans are made by banks, and every bank has its own specific requirements.
That said, there are a few major things lenders consistently look for.
Being a Strong Candidate on Paper
The first thing you need to understand is that the bank wants to see that you are a strong candidate on paper.
So what does that actually mean?
Generally, lenders are looking for:
- A strong credit score
- Liquidity, meaning cash available to purchase
- Stable income
- A reasonable net worth relative to the property you are buying
If you have those things in place, you are already starting from a much stronger position.
Down Payment and Reserves
The second thing banks are looking at is your available down payment.
But they are not just asking whether you can cover the purchase. They also want to see that you still have reserves left over afterward.
In other words, they do not want you putting every dollar you have into the deal and leaving yourself with nothing afterward. Lenders want to know that you will still be financially stable after closing.
Debt Service Coverage Ratio
The third major factor is the debt service coverage ratio, often referred to as DSCR.
This is one of the largest determinants in whether a property qualifies for financing.
Essentially, the bank wants to see that the property generates enough income to cover all of the expenses, including the mortgage payments, while still maintaining a safety buffer.
Typically, lenders are looking for the property to produce roughly 20% to 25% more income than what is needed to cover expenses and debt service.
The purpose is simple. The bank wants to make sure there is enough margin in the deal so the borrower does not get into trouble if income softens or expenses rise.
Global Debt Service Coverage
Sometimes a property may be a little thin on debt service coverage, which is pretty common in today’s environment.
When that happens, banks may look at something called a global debt service coverage ratio.
That means they evaluate your entire portfolio rather than only looking at the individual property you are buying. If you already own properties with strong cash flow and significant equity, the lender may factor those into the analysis.
This can be very helpful for investors who are growing a portfolio because it allows stronger-performing assets to support additional acquisitions.
Personal Guarantees
The fourth thing banks typically require is a personal guarantee.
And in many cases, if the borrower is married, the lender will also require a guarantee from the spouse.
The reason comes down to asset ownership. If assets are jointly owned between spouses, the bank wants to ensure it has the legal ability to pursue those assets if necessary.
So personal guarantees are a very common part of commercial lending.
Post-Closing Liquidity
The fifth major requirement is post-closing liquidity.
This simply means the bank wants to see that you still have cash available after your down payment and closing costs are paid.
Generally, lenders are looking for somewhere around 5% to 10% liquidity remaining after the transaction closes.
Again, the goal is stability. Banks want to know that you have enough reserves to handle unexpected repairs, vacancies, or operational challenges after purchasing the property.
Final Thoughts
Commercial loans are based on more than just income or credit score alone. Banks are looking at the full picture, including liquidity, debt service coverage, net worth, reserves, and personal guarantees to make sure both the borrower and the property are financially stable.
Many investors we work with appreciate understanding these requirements before they begin searching for multifamily properties so they can position themselves more effectively with lenders. If you are looking for multifamily investments in Pennsylvania or Maryland, reach out to us. We are always happy to help.
