Why a Mutifamily Loan Borrower Needs to Look Beyond Their Credit Score

Credit ScoreA credit score is particularly important in loan applications. In personal loans, this is one factor that lenders look at and require. In loan applications with business elements, however, requirements can go beyond that.

Let’s look at multifamily loans, for instance.

Qualitative Information

Lenders consider a borrower’s management property experience as well as rent collection experience in addition to the properties they own. This is to give them a background and understand the borrower’s capability as a property manager or owner.

Lenders can have a clear grasp on this matter by requiring a copy of the net operating income, debt service coverage, and loan-to-value ratio. The first is the business’ annual revenue (income fewer expenses); the second pertains to the measure of cash flow against debt obligations, and the third is a measure of the amount of loan against the property value.

These property metrics determine how the business is doing and if it is financially viable to continue with its operations. As a commercial real estate manager said to a real estate website, “The property has to service its debt at a comfortable margin.”

Strategies that Lenders Approve

There are fixed requirements that lenders ask of borrowers as far as a multifamily loan is concerned. These include the following:

  • Credit score
  • Tax returns (business, income, personal)
  • Operating statements (for two consecutive years)
  • Rent roll for the property
  • Plus the property metrics mentioned above
  • Down payment of at least 30 percent

Considering that every borrower has a unique profile, lenders try to help borrowers work on areas where they are weaker.¬†For instance, in properties where debts don’t support rent a borrower’s cash flow could complement it.

Another example would b, vacant or partially occupied properties will be financed short-term on a more variable rate. In this arrangement, it is expected for it to be extended to a long-term financing when the business stabilizes.

Lastly, most borrowers don’t put their name on the property title. Instead, they use a limited liability company.

A multifamily loan is made for investment purposes. The more the borrower can command a reliable business background and a credible credit score, the more likely he’ll get the financing he needs. Still, a person’s personal financial standing stays vital especially for those that are only starting out in this venture.