The following are the basic analysis done by the underwriter / loan processor to assess the mortgage application.

Credit Worthiness:

For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations, business performance and credit rating will be evaluated with a proven track record.

Property Analysis Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

Credit Score:

Most loans on the market today are credit score driven with the exception of FHA(one of the best loan programs on the market for people with minor issues that lower scores) and a very few non-conforming loans. Credit scores range from 300 to 850. A rule of thumb: The higher we score, less risk, lower interest and less down payment required. Lower scores could require a larger down payment and could have higher interest.

Credit scores are just one factory but here is the basic break down for loan qualifications:

A score of 620 and above will get us into a conventional conforming loan with the lowest rates available (Fannie Mae and Freddie Mac). These rates are 1% above the 10 year T-Bill.

In the non-conforming market, credit scores will determine our interest rate. We may be in this market for many reasons, not just score. It could be because; our loan amount exceeds conventional guidelines, the house does not qualify, nod down payment, high debt ratios, credit history issues, or you could be self employed and don't show enough income to qualify.

Credit scores above 620 will get us the best rates in this market which is 1 to 2 points higher than the conforming market, depending on the type of loan we are getting.

Scores from 580 to 620 could put us as much as 3 to 4 points higher in rate, and we can still qualify for a zero down program.

If our score is below 540 we will need at 20% down payment and the rate will be 4 or more points higher.

Down Payment Guidelines:

The main thing to remember here is that our down payment has to be "Sourced and Seasoned". It means the lender wants to verify that it is indeed our funds and they want to see it in an institution for at least three months. We will have to show three months bank statements. If we have $20000 under our mattress, we cannot use it for down payment.

Exceptions to every rule!! Well, FHA will allow mattress money if we can prove that we do not use banks for checking and savings and operate on a cash only basis.(No credit either) There are also a few non-conforming loans that do not source or season the funds. And, of course there are programs that allow Gifts for down payments but those funds usually have to be sourced too.

Non- Conforming :

It is quite common to get 100% financing in this market. Some lenders have more than 100% financing. Of course rates are higher because the risk is higher, and these programs are credit score driven. A score lower than 580-600 will usually require a down payment and the lower the score the larger the down payment.

Financial Analysis :

A key component in making an underwriting evaluation is the debit coverage ratio (DSCR). The DSCR is defined as the monthly debit compared to the net monthly income of the investment property in question. Using a DCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment. Typically they will determine the DCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income. The higher the DCR ratio is the more conservative the lender. Most lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of income generated.) Anything less than 1:1 ratio will result in a negative cash flow situation raising the risk of the loan for the lender. DCR's are set by property type and what a lender perceives the risk to be. Today, apartment properties are considered to be the least risky category of investment lending. As such, lenders are more inclined to use smaller DCR's when evaluating a loan request. Make sure that we familiar with a lender's DCR policy prior to spending money on an application. It is feasible to ask them the preliminary review of the investment property that we want to purchase.

Loan to Value:

Unlike residential lending, commercial investment properties are viewed more conservatively. Most lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of mortgage provided by either a bank or mortgage company. Some commercial mortgage lenders will require more than 20% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property.

Loan to value is the percentage calculation of the loan amount divided by purchase price. If we loan what a lender's LTV requirements are, we can also calculate the loan amount by multiplying the purchase price by the LTV percentage. We should always keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less than the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.

Debt to income ratios:

Debit to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. They are used to determine if we have the capacity to repay our mortgage. There are two calculations. The first of Front Ratio is our housing expense-to-income ratio. This is to say our proposed mortgage payment (principle, interest, taxes and insurance) divided by our gross monthly income. The second or Back Ratio is our total monthly obligation-to-income rations. This is our gross monthly payment including mortgage PITI divided by our gross monthly income.