When it comes to securing commercial real estate financing, many investors focus solely on their credit score. While a strong credit profile is important, it’s just one piece of the puzzle. Lenders evaluate a wide range of factors to assess your ability to repay the loan and the risk of the investment.

Here’s what you need to know about the key criteria lenders use—and how to position yourself for approval.

1. Debt Service Coverage Ratio (DSCR)

What It Is:
DSCR measures your ability to cover loan payments with the property’s net operating income (NOI). It’s calculated as:
DSCR = Net Operating Income (NOI) / Total Debt Service

Why It Matters:
Bank lenders typically require a DSCR of 1.25x or higher but for our cash flow asset-based loan product, called a DSCR loan, DSCR can be as low as 1.10 or even lower in some scenarios. A ratio below this threshold signals higher risk, potentially leading to higher interest rates or denial.

How to Improve It:

• Increase NOI by raising rents or reducing operating expenses.
• Reduce debt service by negotiating lower interest rates or extending loan terms.

2. Loan-to-Value Ratio (LTV)

What It Is:
LTV compares the loan amount to the property’s appraised value. For example, a 750k loan on a 1M property has an LTV of 75%.

Why It Matters:
Most lenders cap LTV at 65–80% for commercial loans. A lower LTV reduces the lender’s risk and improves your chances of approval.

How to Improve It:

• Make a larger down payment to reduce the loan amount.
• Choose properties with strong appreciation potential or undervalued assets.

3. Cash Reserves

What It Is:
Cash reserves refer to the liquid assets you have on hand to cover loan payments in case of unexpected vacancies or expenses.

Why It Matters:
Lenders want to see that you can weather financial setbacks without defaulting. Most require 6–12 months of reserves for commercial loans.

How to Improve It:

• Build up savings before applying for a loan.
• Reduce personal debt to free up cash flow.

4. Property Type and Condition

What It Is:
Lenders evaluate the property’s type (e.g., office, retail, multifamily) and condition to assess its income potential and risk.

Why It Matters:
Certain property types (e.g., multifamily) are considered lower risk due to stable cash flow, while others (e.g., retail) may face higher scrutiny.

How to Improve It:

• Choose properties in high-demand markets with strong occupancy rates.
• Address any major maintenance or repair issues before applying.

5. Borrower Experience

What It Is:
Lenders assess your track record in managing similar properties or projects.

Why It Matters:
Experienced borrowers are seen as lower risk because they’re more likely to navigate challenges successfully.

How to Improve It:

• Highlight your past successes in loan applications.
• Partner with experienced co-borrowers if you’re new to CRE investing.

6. Exit Strategy

What It Is:
Your plan for repaying the loan, whether through property sale, refinancing, or cash flow.

Why It Matters:
Lenders want to see a clear, realistic exit strategy that ensures they’ll be repaid.

How to Improve It:

• Provide detailed projections for property sale or refinance.
• Include contingency plans (e.g., backup buyers or alternative financing).

Conclusion

While a strong credit score is important, it’s only one factor lenders consider when evaluating your loan application. By understanding and optimizing the broader criteria—like DSCR, LTV, and cash reserves—you can position yourself as a low-risk borrower and secure better terms.