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The 4 C’s of Commercial Mortgage Lending: Capacity to Pay

Commercial Mortgage
Posted on 
November 10, 2015

Whether or not your borrower can make their monthly small-balance commercial mortgage payments will be a major factor in determining whether they receive the financing they need. As a commercial mortgage broker, it’s your job to collect the necessary information to present to your commercial mortgage lender to prove that your borrower does have the capacity to pay. Here’s what you need in order to prove your borrower will be able to make their payments:

Obtain profit and loss statements.

In order to understand your borrower’s ability to repay commercial mortgage debt, it is important to obtain their business’ profit and loss statements. These reports give the lender a quick snapshot of how the business is preforming and will be crucial to help determine whether or not your borrower can afford their monthly payments.  An analysis of how the cash flows within the business, will allow the lender to recognize how well the borrower is handling their current income and debt.  Be sure to have the P&L’s in your borrower’s file to pass onto your lender.

Understand the debt service coverage ratio.

With income producing properties, one important way lenders will determine the amount of the loan, and if the building’s income is able to carry the mortgage payments, is by calculating the debt service coverage ratio. If the property itself isn’t producing enough income, many lenders will be reluctant to supply the amount of financing your borrower is requesting or turn it down altogether.  A formula for you to use to quickly determine if the property cash flows is:  Annual Rental Income – Vacancy Loss – Payments –Expenses = Cash Flow. Divide that cash flow number by 12 and that will give you the mortgage payment that building will cover. Get a better understanding by reading our previous blog post on how your lender calculates debt service coverage ratio.

Ask the right questions.

While the above documents will aid both you and your lender in determining your borrower’s capacity to pay, there’s no substitute for talking with your borrower about their situation. If you are working with a non-bankable borrower, you need to make sure you’re asking certain questions. Are they behind on any debt? What kind of debts have they incurred? If they’re having issues paying their debts now, how will this mortgage help them? You also need to ask if they’ve recently borrowed on other real estate owned and if they have other sources of income.  Confirm that their credit explanations are in sync with their credit report’s time line.

In order to provide your borrower with the small-balance commercial mortgage they need, your lender will need to make sure they have the ability to repay the loan. Providing your lender with the above information about your borrower’s capacity to pay will give your lender the information necessary to make a financing decision and will allow the lending process to move more quickly.

Other blogs in this series include: Credit, Collateral and Character.


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