Four Reasons Why Lenders May Decline Commercial Mortgage Applications

There are a number of reasons why a lender may feel unable to support a request from a business for a commercial mortgage. Below we highlight four of them: –

Security in the form of a first legal charge over the business premises to be bought with an acceptable % security valuation margin is usually required when considering a commercial mortgage application.
A lender will require an adequate level of security if it is going to provide a commercial mortgage.

Inadequate Security

Commercial mortgage requests are usually for a significant sum of money often being for hundreds of thousands of pounds and some even for many millions of pounds. Therefore, a lender will require an adequate level of security to reduce their exposure to risk that they can realise if the borrower is unable to meet the commercial mortgage repayments.

Lenders have different criteria. The minimum security requirement would normally be in the form of a first legal charge being taken over the commercial premises that the mortgage being sought is to be used to help purchase. The lender will have a maximum % of the forced sale value (FSV) of the property that they will lend with this varying between lenders but is unlikely to exceed 80% of the FSV with the customer having to find the balance. The lender may also require other security such as guarantees from the directors/business owners that they may wish to be supported by way of mortgages over the guarantors’ residential properties. A mortgage debenture may also be required.

If the business is unable to satisfy the lender’s security requirements then the commercial mortgage application is likely to be declined.

Affordability

The business must demonstrate its ability to be able to afford the repayments on a commercial mortgage that are normally made by way of monthly repayments. This could be shown in a variety of ways such as having repaid a commercial mortgage and/or other forms of lending in the past, providing 12 month’s bank statements that show a surplus of funds each month sufficient to meet the monthly repayments and the production of a cash flow forecast.

Adverse Information With The Credit Reference Agencies

As part of its underwriting process, a lender will no doubt carry out a credit reference search with one or more of the credit reference agencies to check if there is any adverse data registered against either the business and/or the directors/owners. If there is then, depending what it is, that particular lender may not be able to assist.

Inadequately Prepared

When applying for a commercial mortgage the lender will require certain information that may include such things as a business plan, cash flow forecast, the last 3 years audited accounts, up-to date management accounts and 12 month’s bank statements. If this information is not presented at the outset it will not create a favourable impression with the lender and could lead to an application being declined.

The above are just four of the reasons why a lender may reject a commercial mortgage application. However, by using the likes of a commercial mortgage broker, he or she should be able to advice the client as to whether their application is likely to be well-received by a lender or not, identify a potential suitable lender and assist them in making sure the business produces all the information that a particular lender will require when making the application.

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