Conventional Financing

What Is Conventional Financing?

Conventional financing refers to loans provided by banks, credit unions, or institutional lenders that are not insured or guaranteed by a government agency (like the SBA). These loans typically require strong borrower credentials, including solid credit, proven income streams, and a stabilized property.

They are commonly used to acquire stabilized assets. The terms are generally fixed-rate or floating, with amortization periods ranging from 20 to 30 years and loan terms typically between 5 and 10 years. Conventional loans typically involve recourse, meaning the lender can pursue the borrower's personal assets beyond the property used as collateral if the sale of the collateral doesn't cover the full loan amount in the event of default

Key Metrics Lenders Care About

Here are the key factors lenders evaluate before issuing a conventional CRE loan:

• Debt Service Coverage Ratio (DSCR): The ratio of Net Operating Income (NOI) to annual debt service. Most lenders require a minimum DSCR of 1.20x.

• Loan-to-Value (LTV): The loan amount divided by the property's appraised value. Conventional loans typically cap at 65% to 75% LTV.

• Stabilization: Lenders prefer assets that are at or near market occupancy. For instance, stabilized multifamily properties often reflect 95% occupancy; office buildings may stabilize around 85% post-COVID.

• Borrower Strength: Track record, personal balance sheet, and whether the borrower is willing to offer recourse (personal liability).