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.

Commercial Lending Ratios
Most of real estate lending can be boiled down to the results of three ratios:
• Loan-To-Value Ratio or Loan-to-Cost (for construction)
• Debt Ratio
• Debt Service Coverage Ratio (DSCR)
The bulk of the energy spent "processing" a loan is merely an attempt to verify the numbers that go into the numerator and denominator of the above 3 ratios.

The Loan-To-Value Ratio (LTVR) is defined as follows:
Loan-To-Value= Total loan balances (1st mtg+2nd mtg+3rd mtg) / Fair market value (as determined by appraisal)
Loan-To-Value Ratios seldom exceed 80% because the lender always want some extra protection against default.

The second ratio that lenders use when underwriting a loan is the Debt Ratio. The Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of monthly income he earns. More precisely, the Debt Ratio is defined as:
Debt Ratio = Monthly Debt Obligations / Monthly Income
Obviously someone whose Debt Ratio is 150% is in trouble. A Debt Ratio of 150% would mean that a borrower's obligations are one and a half times his income. Debt Ratios seldom are allowed to exceed 40% in practice.

The final ratio used in lending is the Debt Service Coverage Ratio (DSCR). The Debt Service Coverage Ratio is a sophisticated ratio only used for large loans on income producing properties. It is defined as:
Debt Service Coverage Ratio = Net Operating Income / Debt Service
Net Operating Income is the income from a rental property after deducting for real estate taxes, fire insurance, repairs, and all other operating expenses; and Debt Service is the mortgage payment on the property. Most lenders insist that this ratio exceed 1.0. A debt service coverage ratio of less than 1.0 would mean that the property did not produce enough net rental income for the owner to make the mortgage payments without supplementing the property from his personal budget.

Your lender will want specific information about the property. More than likely they will ask 2 years accounting statements for operating expenses and rents. You should have this before your lender ask for the documentation. You will use the statements to start doing your research not only for the ability of this property to service the debt but also to determine whether its a good investment or not. A good thing to acquire for the seller is estoppel certificates. These are statements from each tenant as to what they pay in rent and what their deposit was when they moved in. The deposits are usually transferred to the new owner and there is usually a place on a promulgated contract for this. You will also want to look at your vacancy rate and what the typical vacancy factor is for you area. This can have a huge impact on your ability to service the debt.

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 ratings will be evaluated with a proven track record.

It is important that you can service the debt on any apartment building loan you might take out. This may seem like an obvious point, but if you have not determined your estimated monthly revenues from rental income for the apartments, it will be extremely difficult to know if you can service the debt on an apartment loan.

Financial Analysis
A key component in making an underwriting evaluation is the debt coverage ratio. The DCR is defined as the monthly debt 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 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 then a 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 you are familiar with a lender's DCR policy prior to spending money on an application. Ask them to give you a preliminary review of the investment property that you want to purchase. Information is free, mistakes are not.

An apartment building that has more than 4 units will be classified as commercial property, and will therefore require commercial financing. There are a number of mortgage brokers and lenders that specialize in commercial financing. Even more specifically there are lenders that specialize in financing apartment buildings, strip malls, mixed use property, and gas stations just to name a few.

An apartment building is classified as a multifamily property. The number one factor that will determine how you finance such a property will be how many units are in the property. A property with 4 units or less is classified as residential property. In this case, a potential borrower can obtain financing through a residential mortgage.

Understand that apartment financing is underwritten on a case by case basis. Every loan application is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages.

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 a mortgage provided by either 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 you know what a lender's LTV requirements are, you can also calculate the loan amount by multiplying the purchase price by the LTV percentage. Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less then the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.