Underwriting is the lender’s process of determining if a borrower meets their criteria for a loan. In the underwriting process, a lender considers the potential borrower’s credit, capacity, and collateral. Source

Underwriting is lender’s process of determining if a borrower meets their criteria for a loan. Underwriters usually consider three C’s - credit, capacity and collateral. When it comes to HUD 223(f) loans, lenders will also examine a borrower’s experience with owning and managing similar multifamily properties as part of their underwriting process. Source

The purpose of underwriting in commercial real estate financing is to determine if a borrower meets the lender's criteria for a loan. Underwriters usually consider three C’s - credit, capacity and collateral. When it comes to HUD 223(f) loans, lenders will also examine a borrower’s experience with owning and managing similar multifamily properties as part of their underwriting process. Source and Source.

The underwriting process typically involves the following steps:

• Examining the borrower's credit, capacity, and collateral (the 3 Cs).
• Requiring third-party reports, such as a full appraisal and Phase I Environmental Assessment.
• Checking into a borrower’s credit history, net worth, and commercial real estate experience.

The requirements for the underwriting process vary depending on the type of loan. For example, HUD 221(d)(4) and HUD 223(f) loans require a significant underwriting process, while HUD 223(a)(7) loans require only minimal underwriting. For FHA 232 financing, lenders will consider both the borrower’s financial strength, as well as the borrower’s history of owning and operating similar facilities in the past, in order to determine their suitability for a loan. For CMBS origination, the underwriting process is intended to determine whether a borrower presents a reasonable credit risk to a lender. Borrower credit, net worth, and experience requirements are significantly less strict for conduit loans than for bank or agency loans (i.e. Fannie Mae and Freddie Mac).

The risks associated with underwriting include the potential for lenders to make mistakes in their assessment of a borrower's credit, capacity, and collateral. Additionally, if a borrower does not have a history of owning and managing similar properties, they may not be approved for a loan. For HUD multifamily loans, such as HUD 221(d)(4) and HUD 223(f) loans, the underwriting process is more rigorous and the risks are higher. For HUD 223(a)(7) loans, the underwriting process is less rigorous and the risks are lower.

The primary benefit of underwriting for commercial real estate financing is that it reduces the amount of risk lenders carry and allows them to make more loans. This can increase liquidity in the market, which can make it easier for commercial real estate borrowers to get loans in the first place. In addition, that increase in market liquidity may also eventually bring down interest rates for borrowers.

Securitization also has a variety of benefits, but they aren’t always obvious to the borrower. Securitization primarily benefits lenders, as they can remove most or all of a borrower’s debt from their balance sheets once they have sold it on the secondary market. This reduces the amount of risk they carry and permits them to make more loans. This can increase liquidity in the market, which (albeit indirectly) can make it easier for commercial real estate borrowers to get loans in the first place. In addition, that increase in market liquidity may also eventually bring down interest rates for borrowers — though this doesn’t always happen.

Lenders will also want to get an idea of your income and expenses — basically, they’ll want to know if you have enough money coming in to make loan payments on time and in full. To do this, they’ll likely request tax returns and bank statements. They may also ask for documentation of any other assets or liabilities you have. Being able to show that you have a healthy cash flow is crucial when qualifying for a commercial real estate loan.