The most common reasons for commercial mortgage applications being denied can be categorized based upon fourt factors, financial issues, business-related factors, documentation or application issues and property related issues. Specific elements among each of these aspects are the focus of this discussion:
Financial Issues
Insufficient Cash Flow
Poor cash flow or inability to demonstrate stable income is a major reason for rejection15. Lenders need to see that the business can generate enough revenue to cover loan payments.
High Debt-to-Income Ratio
A high debt-to-income ratio is frequently cited as a top reason for denial14 8. Lenders typically prefer a DTI below 35-45%.
Low Credit Score
Both personal and business credit scores play a crucial role. Poor credit history or low credit scores can lead to rejection 1.
Insufficient Collateral
Many lenders require collateral for commercial mortgages. Lack of sufficient collateral to secure the loan can result in denial 1.
Business-Related Factors
Lack of Experience
Insufficient experience in the real estate industry or business management can make lenders hesitant 1.
Short Business History
Lenders often require at least two years of business history. Startups and newer businesses may face challenges in securing approval 2.
Risky Industry
Some lenders may reject applications from businesses in industries they perceive as high-risk6 2.
Documentation and Application Issues
Incomplete or Inconsistent Documentation
Missing, incomplete, or inconsistent paperwork is a common reason for rejection 1.
Inability to Verify Information
Lenders may deny applications if they cannot verify income, employment history, or other critical information 4.
Poor Business Plan
A weak or unconvincing business plan can lead to rejection, especially if it doesn't adequately support the requested loan amount 3.
Property-Related Issues
Unfavorable Property Appraisal
If the property's appraised value doesn't support the loan amount or sales price, the application may be denied 5.
Environmental or Zoning Concerns
Issues with zoning, permits, or environmental factors can lead to rejection 1.
Market and Economic Factors
Unfavorable Market Conditions
Current real estate market conditions can influence lenders' decisions 1.
By addressing these common issues before applying, businesses can significantly improve their chances of securing a commercial mortgage. If you will soon be considering the need for property financing, consider working with Prosper Financing. We can help guide you through the intricacies of commercial financing, ensuring you complete a well formulated application package prior to submitting your request to the lenders of your choice, improving your ability to have a smooth lending process helping you to achieve your investment goals.
Sources
- Mestler, Chad. “Top 10 Reasons a Commercial Loan Submission Is Rejected.” Helveticagroup.Com, 14 Jan. 2023, https://blog.helveticagroup.com/top-10-reasons-a-commercial-loan-submission-is-rejected.
- Gillman, Matthew. “7 Reasons You May Have Been Denied Business Financing.” America’s SBDC, https://americassbdc.org/7-reasons-you-may-have-been-denied-business-financing/?print=print. Accessed 13 Jan. 2025.
- Northwood. “Reasons for Denying Commercial Mortgages and Business Loans.” Home & Commercial Mortgage Services - Northwoodmortgage.Com, 26 Sept. 2019, https://www.northwoodmortgage.com/blog/reasons-for-denying-commercial-mortgages-and-startup-business-loans/.
- Naik, Sejal. “Top 5 Reasons for Mortgage Application Denials.” Virginia REALTORS®, 28 Aug. 2024, https://virginiarealtors.org/2024/08/28/top-5-reasons-for-mortgage-application-denials/.
- Ceizyk, Denny. “Mortgage Loan Denied in Underwriting: Why It Happens and What To Do.” LendingTree, 24 Mar. 2023, https://www.lendingtree.com/home/mortgage/denied-credit-for-home-loan/.