How Lenders Actually Underwrite Your Building

If you have ever looked at a lender's underwriting and thought, where on earth did those numbers come from? I have a solution. Today I am going to walk you down their checklist, line by line, so nothing in that file surprises you again. I'm Shafiq Hirani, MBA, CCIM. I have sat on both sides of this file, and I can tell you the underwriting is not a black box. It is a checklist. Once you have seen the checklist, you can run it yourself. Quick note, if you have already watched my videos on the NOI gap and DSCR, you know the basics. Skip ahead about 90 seconds and I will show you something new— how the lender assembles all of these adjustments into a single decision. If this is your first one, stay with me because the foundation matters. On screen, show a chapter marker at 1:30 labeled the full adjustment stack. YouTube chapters make this skip explicit and reduce drop-off from returning viewers. And if this is useful, like and subscribe. It puts this in front of the next owner walking into the same file. Let's go. Here's the one idea everything rests on. The lender does not use your income, they rebuild it. They start with your gross rents and then they make a series of adjustments, every one of which is designed to answer a single question: what does this building reliably produce in a normal year? Not your best year.

Now here's the part most owners have never actually seen— the complete stack in the order they walk it. 1, gross scheduled rent. Every unit at its market rent, fully occupied. Vacancy and collection loss. They apply a standard factor, usually 5%, even if you are completely full today. They normalize your operating expenses. If your reported expenses look low for a building of this age and size, they raise them to what the building should cost to run. Management fee. 5 to 6% of collected rent, added even if you self-manage because they underwrite for the next owner. 5, replacement reserves, a few hundred dollars per unit per year set aside for future capital needs, whether or not you actually reserve it. 6, they arrive at their net operating income. On our example building, that is $275,200 versus the $313,600 you calculated. Here's where it goes. Beyond what most owners understand. That net operating income does not just sit there. It gets run through 2 separate tests, and the lender takes whichever yields the smaller loan amount. The first test is value— 75% of what the building appraises for. The second is coverage— their income divided by 1.25 converted into a loan. For our building, the value allowed was $3.18 million. Coverage allowed $2.72 million. They took $2.72 million. So underwriting is not one calculation. It is a stack of adjustments feeding 2 tests, and the more conservative test wins every single time. Underwriting is a checklist, not a mystery. 5 adjustments build their income, 2 tests size the loan, and the smaller number always wins. Once you can run that yourself, nothing in the file surprises you. If this made the file make sense, like and subscribe and tell me in the comments which adjustment on that stack surprised you most. For many owners, it is the management fee they do not even pay. The Refinance Navigator Checklist walks the full stack with your own numbers. Link below or scan the code. Next, if the lender is running a checklist, you can hand them a package that answers it before they ask. That is the single highest leverage move in a refinance, and it is next.