Credit Requirements & Underwriting Guidelines
for Owner-Occupied Loans

Requirements may vary between lending products, but the following should give you a good overview of what is generally expected from lenders offering loans for owner-user properties (i.e. this is what the average lender requires, but exceptions may be made on a case-by-case basis):

1. Personal Guarantees

Owners with at least 20% stake in the property and/or the occupying business will generally be required to sign a guarantee1 for the repayment of the loan.

  • For an SBA 7(a) loan, not only will the loan be secured by a mortgage on the property and the personal guarantee of the sponsors and the business, but also by all business assets (usually via a UCC lien), and the sponsors' personal residences. Typically, a "blanket lien" is used against all of the Sponsor's property.
  • Loans that are personally guaranteed by the business/building owners are usually called" recourse loans."

2. Net Worth

Loan guarantors (building owners and business) should usually have a combined net worth equal to or greater than the loan amount being requested.

  • Net worth is the difference between all of your assets and all of your liabilities (including the business). This helps the lender assure that the loan will be repaid in the event of default.
  • The easiest way to calculate your net worth is by filling out a Personal Financial Statement (which helps you list out your personal assets and liabilities) and looking at your business' balance sheet to find the net worth of each individually. Then you add the net worth of the business and your personal net worth together to find your combined net worth. Make sure not to add your business assets/liabilities for the business guaranteeing the loan to your personal financial statement, as it will be reflected inside the balance sheet; other outside business interests or real estate holdings are okay on your personal financial statement.
Business Net Worth + Personal Net Worth = Total Combined Net Worth

Loan Guarantors should have a combined post-closing liquidity of at least 10% of the loan amount after the down payment (although some lenders will go down as low as 6 months of mortgage payments, and some will go as high as 10% of your total debt).

Example of 10% Post-Closing Liquidity: If you are buying a building that is $1,200,000 and need to put down $200,000, your loan would be $1,000,000. You would therefore need to have $100,000 in post-closing liquidity after your down payment (10% of $1,000,000), which means you are starting with $300,000 total before the down payment.

Example Calculations:

$1,200,000 (Purchase Price) - $200,000 (Down Payment) = $1,000,000 (Loan Amount)

$200,000 (Down Payment) + $100,000 (Post-Closing Liquidity) = $300,000 (Funds Required to Purchase)

Example of 6 months of Mortgage Payments: Take the above example and assume that the monthly mortgage payments on your new $1,000,000 mortgage are going to be $6,000 per month. Your post-closing liquidity would need to be $36,000 ($6,000 x 6). If you need to put $200,000 as a down payment and your post-closing liquidity requirement is $36,000, you would need to start with $236,000 in funds to meet the down payment and post-closing liquidity requirements.

Example Calculations:

$6,000 (monthly mortgage payments on $1,000,000 Loan) x 6 = $36,000 (Post-Closing Liquidity)

$200,000 (Down Payment) + $36,000 (Post-Closing Liquidity) = $236,000 (Funds Required to Purchase)

3. Down Payment Requirements

Borrowers should plan on contributing anywhere from 10-25% of the purchase price (depending on loan program) as a down payment.

  • Different lending programs have different down payment requirements, so you would need to check with individual lenders.
  • On an SBA or USDA loan, you may be able to put as little as 10-15% (depending on if it is the 504 or 7A program), and may be able to finance part or all of the fees.
  • Most conventional loans (bank, credit union, savings institution) will require anywhere from 15-30% down, depending on the asset type and lender requirements.2

4. Personal Credit & FICO Scores

Owners generally need personal FICO scores of at least 680 and the existing businesses should have a score of 155, unless there is a reasonable explanation, which should be discussed up front with your Lender. They usually also require that you do not have any foreclosures, bankruptcies, short sales, judgment, liens, or collections in the recent past (usually within 10 years), unless there is a reasonable explanation.

5. Debt Service Coverage Requirements

Business should have an underwritten Debt Service Coverage Ratio of at least 1.25x for the last 2-3 years; if your DSCR falls short, you may want to write up an explanation of why income was lower or expenses were higher (to see if the lender can find a work-around); alternatively, sometimes the global cash flow can be used to add into the business income.

  • The Debt Service Coverage Ratio (DSCR) is the business' net operating income over the annual mortgage payments, and is usually expressed as a whole number rather than a percentage (i.e. 1.25x rather than 125%).
    Debt Service Coverage Ratio = Net Income / Annual Mortgage Payments
  • Global Cash Flow is the cash flow received from all sources of the building owners' income, including outside investments, other businesses, W-2, and 1099 income.
  • Having investment income from other tenants can also help add to the cash flow, increasing your DSCR.

Example: Your business' annual net operating income (not including depreciation, amortization, or mortgage payments) is $135,000 and the annual mortgage payment on your new $1,000,000 mortgage is $72,000 ($6,000 x 12). $135,000/$72,000 is 1.875x, so you would meet the DSCR requirement.

Example Calculations:

$6,000 (Monthly Mortgage Payment) x 12 = $72,000 (Annual Debt Service)

$135,000 (Business NOI) / $72,000 (Annual Debt Service) = 1.875x

6. Experience

Although experience with the type of building being purchased is preferred (especially for specialty use properties), it's usually not required as long as the business cash flows appropriately for the debt.

  • 1A guarantee is a promise to repay the loan in the event that the Borrower (i.e. building owner) defaults on the mortgage. It means that both the human beings who are behind the purchase of the building and business will assume the debt obligation in the event the Borrower cannot or will not make the contractual mortgage payments for the loan.
  • 2Specialty use properties (i.e. church, car wash, car dealership, auto repair shop, gas station, etc.) may require more money down to purchase because the property only has one possible use, which limits the number of buyers that would be able to reuse the property; the opposite would be true of “general use” properties (i.e. office buildings, industrial warehouses, etc.) because a number of different businesses would be able to use the property.