What Happens During Underwriting?

What Is Commercial Loan Underwriting?

Underwriting is the process where a lender evaluates whether to approve your loan, how much to lend, and on what terms. It is the most critical phase of any commercial loan -- everything before it is preparation, and everything after it is execution.

Unlike residential mortgages, which are largely automated through algorithms, commercial loan underwriting is a human-driven process. An underwriter (or team of underwriters) manually reviews your financial documents, evaluates the property, assesses risk factors, and makes a recommendation to a credit committee. Understanding what happens at each step helps you prepare better and avoid surprises.

---

The 8-Step Underwriting Process

Step 1: Completeness Check

The underwriting process begins with an administrative review. A loan processor or junior analyst confirms that every required document has been received, is legible, is current, and matches the application. If anything is missing, you receive a "stip list" (stipulation list) requesting the missing items. Your file does not move forward until the package is complete.

Timeline: 1-3 business days. Delays here are almost always caused by incomplete packages from the borrower.

Step 2: Credit Analysis

The underwriter pulls personal credit reports for all guarantors (anyone owning 20% or more of the borrowing entity) and reviews business credit reports (Dun & Bradstreet, Experian Business). They are looking at:

• FICO scores. Most conventional lenders require 680+. SBA lenders often work with 650+. Bridge lenders may go lower with compensating factors.
• Credit history patterns. Late payments, collections, charge-offs, judgments, and how recently they occurred.
• Existing debt obligations. Credit cards, auto loans, mortgages, student loans, other commercial loans.
• Bankruptcies and foreclosures. Most lenders require 4-7 years of clean history post-discharge.
• Public records. Tax liens, UCC filings, pending litigation.

Step 3: Financial Analysis

This is the most intensive step. The underwriter analyzes your ability to repay the loan using several methods:

Debt Service Coverage Ratio (DSCR):

Net Operating Income / Annual Debt Service = DSCR. Most lenders require a minimum 1.20x to 1.35x DSCR, meaning the property generates 20-35% more income than needed to cover loan payments.

Global cash flow analysis:

For smaller loans and owner-occupied properties, lenders look at the borrower's total income (personal + business + rental) against total obligations (existing debts + proposed loan). This is sometimes called "global DSCR."

Trend analysis:

Are revenues growing or declining? Are margins stable? Underwriters look at 2-3 years of financials to identify trends. A business with declining revenue faces higher scrutiny even if current ratios are acceptable.

Liquidity assessment:

How much cash and liquid assets does the borrower have after closing? Most lenders want to see 6-12 months of debt service in post-closing liquidity (cash reserves after down payment and closing costs).

Step 4: Appraisal Review

The lender orders an independent appraisal from a licensed MAI appraiser. The appraisal determines the property's market value using three approaches:

• Income approach. Capitalized net operating income -- the primary method for income-producing commercial property.
• Sales comparison approach. Recent comparable sales -- weighted more heavily for owner-occupied and smaller properties.
• Cost approach. Replacement cost minus depreciation -- used mainly for special-purpose properties.

The underwriter reviews the appraisal for reasonableness, compares it to the purchase price (if applicable), and uses the lower of appraised value or purchase price to calculate the loan-to-value (LTV) ratio.

Critical detail: If the appraisal comes in below the purchase price, the lender will base the loan on the lower appraised value. This means the borrower needs more cash to close.

Step 5: Environmental Review

For nearly all commercial properties, the lender requires a Phase I Environmental Site Assessment (ESA). This is a desk study and site inspection by an environmental consultant that identifies potential contamination from current or prior uses (gas stations, dry cleaners, manufacturing, etc.).

If the Phase I identifies "recognized environmental conditions" (RECs), the lender may require a Phase II ESA, which involves soil and groundwater sampling. Phase II results can delay or kill a loan if contamination is confirmed.

SBA requirement: Per FDIC guidance and SBA SOP 50 10 5(E), all SBA loans secured by commercial real estate require environmental due diligence. Lenders that skip this step expose themselves to Superfund liability.

Step 6: Title Search and Insurance

A title company searches public records to confirm:

• The seller actually owns the property.
• There are no undisclosed liens, encumbrances, or easements.
• Property taxes are current.
• There are no pending legal actions affecting the property.

The lender requires a lender's title insurance policy that protects the lender (not the borrower) against title defects.

Step 7: Lease and Tenant Review

For income-producing properties, the underwriter reviews every lease in detail:

• Lease terms and expiration dates. Leases expiring within 12 months of closing represent rollover risk.
• Rental rates vs. market. Above-market rents may not be sustainable; below-market rents may indicate upside or problem tenants.
• Tenant creditworthiness. National credit tenants (Walgreens, FedEx, Dollar General) are valued; local tenants without financial statements are discounted.
• Lease structure. NNN leases shift expenses to tenants; gross leases keep them with the landlord.
• Tenant concentration. If one tenant represents more than 30-40% of income, the property's value is tied to that tenant's survival.

Step 8: Credit Committee Presentation

After completing all analysis, the underwriter prepares a credit memorandum summarizing the deal: borrower background, financial analysis, property analysis, risk factors, and a recommendation (approve, approve with conditions, or decline).

This memo goes to the credit committee -- a group of senior lenders who make the final decision. The committee may approve as recommended, approve with additional conditions (higher rate, lower LTV, additional collateral, personal guarantees), or decline.

Timeline for committee decisions: 1-5 business days after memo submission, depending on deal complexity and committee meeting schedules.

---

What Underwriters Look For: 5 Risk Categories

The FDIC's examination guidelines categorize commercial real estate lending risk into five areas. Understanding these helps you anticipate underwriter concerns:

---

Common Denial Reasons

Knowing why loans get declined helps you avoid those pitfalls. These are the 8 most frequent denial reasons in commercial lending:

1. Insufficient cash flow (DSCR below minimum). The property does not generate enough income to cover the proposed loan payments with an adequate cushion. This is the single most common denial reason.

1. Low credit scores or adverse credit history. Bankruptcies within the past 4-7 years, multiple late payments, unresolved collections, or tax liens that demonstrate a pattern of not meeting financial obligations.

1. Inadequate collateral (LTV too high). The property appraises below the purchase price or the loan amount exceeds the lender's maximum LTV threshold. This is common in overheated markets where buyers pay above appraisal.

1. Insufficient experience. First-time investors seeking large or complex deals. Lenders want to see that you have successfully managed similar properties. A first-time buyer seeking a 200-unit apartment complex will face heavy scrutiny.

1. Weak or incomplete financial documentation. Tax returns that do not match bank deposits, P&L statements with unexplained entries, missing schedules, or documents that contradict each other.

1. Environmental issues. Phase I findings that require Phase II investigation, or Phase II results confirming contamination. Remediation costs can exceed property value for severely contaminated sites.

1. Tenant or lease risk. Major leases expiring soon, single-tenant dependency, below-market credit tenants, or lease terms that are unfavorable to the landlord (excessive tenant termination rights, below-market renewal options).

1. Market conditions. Declining submarket, oversupply of competing properties, economic factors affecting the property type (e.g., remote work reducing office demand).

---

How to Prepare for Underwriting: 6 Tips

1. Assemble your package before you apply

Do not wait for the lender to ask for documents one at a time. Use the commercial loan application checklist to prepare everything upfront.

2. Know your numbers

Before the underwriter calculates your DSCR, you should already know it. Calculate your net operating income, divide by the proposed annual debt service, and confirm it exceeds the lender's minimum (typically 1.25x). If it does not, adjust the loan amount or term before applying.

3. Write an explanation letter for any credit blemishes

If you had a bankruptcy, foreclosure, late payments, or tax lien -- write a brief, factual explanation of what happened, when it was resolved, and what has changed since. Attach supporting documentation. Underwriters expect blemishes; they do not expect silence about them.

4. Get your financials CPA-prepared

For loans above $500,000, CPA-compiled or reviewed financial statements significantly reduce underwriting friction. The cost is small relative to the loan amount, and it signals financial discipline.

5. Provide a clear narrative about the deal

Write a 1-2 page executive summary explaining: what the property is, why you are buying or refinancing it, what your business plan is, and how you will service the debt. This gives the underwriter context that raw numbers cannot provide.

6. Respond to stip requests within 48 hours

Once underwriting starts, momentum matters. Every day a stip request sits unanswered is a day your file is not moving. Set aside time daily to respond to lender questions during the underwriting period.

---

Underwriting Timeline by Loan Type

Processing times vary significantly by loan type due to different documentation requirements, government involvement, and structural complexity.

What can extend these timelines: Appraisal delays (2-4 weeks in busy markets), environmental findings requiring Phase II (4-8 weeks), title issues requiring resolution, borrower delays in providing requested documents, credit committee postponements.

---

Frequently Asked Questions

Can I speed up the underwriting process?

The single most effective thing you can do is submit a complete, well-organized document package on day one. Most delays are caused by back-and-forth requests for missing or corrected documents. Beyond that, respond to all lender questions within 24-48 hours and make yourself available for calls. Choosing the right loan product also matters -- bridge loans underwrite in weeks, not months.

What happens if the appraisal comes in low?

You have several options: (1) bring additional cash to cover the gap, (2) negotiate a lower purchase price with the seller, (3) challenge the appraisal with comparable data (rarely successful), or (4) walk away if your purchase contract has an appraisal contingency. The lender will not increase the loan to cover a valuation shortfall.

Do all guarantors need perfect credit?

No, but every guarantor's credit is evaluated. If one guarantor has a 720 FICO and another has a 610, the weaker score will affect the overall credit assessment. Some lenders will accept a lower-credit guarantor if other compensating factors (strong DSCR, low LTV, significant liquidity) are present.

What is a conditional approval?

A conditional approval means the credit committee approved the loan subject to specific conditions being met before closing. Common conditions include: satisfactory appraisal, clean Phase I ESA, execution of a rate lock, receipt of updated financials, or verification of insurance. A conditional approval is a strong positive signal but is not a final commitment.

Can I be denied after receiving a conditional approval?

Yes. If any condition cannot be satisfied -- the appraisal comes in too low, the environmental review reveals contamination, the borrower's financial condition changes materially, or updated documents reveal discrepancies -- the lender can withdraw the conditional approval. This is uncommon but happens, which is why you should not make non-refundable commitments until you have a clear-to-close.

---

Starting a commercial loan application? Submit your deal on FundedDeal for guidance on the underwriting requirements for your specific situation. Already past underwriting? Learn about SBA loan timelines for what comes next.