Is My Credit Score Important for a Commercial Multifamily Loan?Paul Winterowd
The short answer is YES. While the financial performance of the underlying asset takes precedence, the credit and financial strength of the sponsor is also underwritten.
In any loan application situation, whether it’s a standard home loan, a multifamily commercial loan or any other type for that matter, your credit score is an important consideration for lenders. It can define which loans you’re eligible for, plus the rates and other benefits for which you qualify.
Obviously, a high credit score over 700 removes many questions from a lender’s mind and puts them at greater ease offering a loan. In the commercial multifamily space, the price of admission for the standard, most attractive loan rates and terms is a 650 credit score.
If you have a credit score below that, there are still alternatives available, they simply come with greater strings attached (meaning costs). We always recommend to our clients to build and maintain their credit score as high as they can.
Aside from a credit score, in the commercial finance arena we always ask our borrowers if they have ever had a foreclosure or bankruptcy. Again, these aren’t deal breakers, but do require explanation. It is always better to be upfront about any challenges you’ve had in the past rather than hoping the lender won’t find them. The underwriting on a commercial loan is more in-depth than on a residential loan, so these kinds of blemishes on your credit will be uncovered. If you’ve tried to obfuscate or hide the truth you will lose face and trust.
As a multifamily lender, independent of banks, our mission at Bonneville Multifamily Capital is to help get you the perfect multifamily mortgage to fit your needs and credit profile. For many people, a simple lack of understanding about how their credit score is tabulated can lead to confusion – let’s go over these basics to give you a better base of knowledge so you can continue to improve your credit score allowing you greater access to financing.
Improving My Credit Score
There is quite a lot of information both online and offline about credit scores and how to improve those metrics. The value of that information is varied and I personally have read several books on the topic. One common consensus is that credit counseling services are typically more costly than valuable so buyer beware.
The book I recommend on the topic is “Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future” by Liz Weston. Be sure to search for the most recent edition. She does update the content to reflect the most recent trends and insider knowledge.
I’d rather have you read that book and follow her principles than try and regurgitate it here. Since reading the book I have raised my score from about 675 to 800 so I know it works. The book will also outline how you can access your current credit score information as well.
Other Financial Qualifiers for Commercial Loans
The other two important considerations lenders look at for commercial loans is the borrower’s net worth and liquidity. Technically it is the borrower group. Most commercial loans are secured by a single asset entity (typically an LLC) with multiple borrowers (or sponsors). Lenders look at the combined financial strength of these sponsors when underwriting the loan.
A common benchmark for commercial multifamily loans is a combined net worth of the borrowers equal to the loan amount. There are nuances to this and depend on the deal and type of loan, but typically you are safe if you meet that threshold.
Liquidity is the cash reserves you have after your equity injection. The old saying “Cash is King” holds true in commercial multifamily investing. Additionally, while the monies you have in your 401k accounts or IRAs contribute to your net worth calculation, they cannot be included in your liquidity total. Lenders like to see combined liquid assets of the sponsor(s) equal to about 10% of the loan amount. Again, this varies from loan to loan but you’re typically more than qualified with these types of cash reserves. Your cash reserves are not impounded or held in escrow, and the same funds can be used to qualify for multiple loans.
Becoming aware of and staying on top of your credit scores is quite simple these days, and actually doing so will only help your ability to qualify for the multifamily loan you want. To learn more about credit requirements for commercial multifamily loans or any of our multifamily mortgage solutions, contact the loan officers at Bonneville Multifamily Capital today.