Banks and Financing Your Real Estate Deal
What Banks Look for When Financing Your Real Estate Deal
If you're looking to finance a real estate deal using a community bank, you need to know what they’ll be looking for before they fund your loan. While every lender has their own nuances, there are usually five key requirments community banks need you to meet.
These fall into two categories: the Deal and the Borrower.
The 5 Key Lender Requirements
Within the Deal Itself:
- Debt Service Coverage Ratio (DSCR) at or above 1.25x
- Loan-to-Value (LTV) at or below 75%
Regarding You as a Borrower:
- Net worth = loan amount
- Liquidity = 10% of loan amount
- Adequate experience (your REO schedule)
Let’s break this down so you know exactly what banks are looking for and why.
The Deal Itself
When assessing the deal, banks care about two main things: income and collateral.
1. DSCR at or above 1.25x
The Debt Service Coverage Ratio (DSCR) is calculated as:
DSCR = Net Operating Income (NOI) / Debt Service
A DSCR above 1.25x shows the bank that the property generates enough income to cover its loan payments with a comfortable buffer.
Importantly, community banks focus on "in-place" income—they don’t care as much about your pro forma projections. They want to see that the current numbers already work, not just that they might work in the future.
2. LTV at or below 75%
The Loan-to-Value (LTV) ratio ensures the bank isn’t overexposed in case the market shifts.
By only lending up to 75% of the property’s value, the bank builds in a cushion. This way, if things go south and the property value drops, they still have enough equity to recover their loan.
While banks will look at a full underwriting package, these two metrics—DSCR and LTV—are the hard lines that usually make or break a deal.
You as a Borrower
Once the deal itself checks out, the bank turns to you. They want to make sure you are a safe bet as well.
3. Net Worth = Loan Amount
Banks want to know that if the deal goes bad, you have enough personal wealth to make them whole.
If your net worth is equal to or greater than the loan amount, the bank sees you as a lower-risk borrower. If you don’t meet this requirement personally, you’ll need to bring in partners who can help meet the hurdle on a combined basis.
4. Liquidity = 10% of Loan Amount
Having a strong net worth is one thing, but banks also want to see that you have liquid reserves.
They want to make sure that if something goes wrong—unexpected expenses, vacancies, or market shifts—you have enough cash or liquid assets to cover shortfalls without immediately defaulting.
Again, if you don’t meet this requirement, you’ll need to team up with other investors to hit the benchmark together.
5. Adequate Experience (Your REO Schedule)
This is the one soft metric, but it still matters.
Your Real Estate Owned (REO) schedule shows the bank your experience in managing properties. The more properties you own and operate successfully, the more confidence they’ll have in your ability to handle the deal.
Banks worry about the downside, so the less risk they perceive, the better.
As a side note, any investor owning more than 20% of the deal will likely have to guarantee the loan as well, so their financials and experience will be scrutinized too.
Final Thoughts
To sum it up, here’s what banks are looking for:
- Within the Deal Itself:
- DSCR at or above 1.25x
- LTV at or below 75%
- Regarding You as a Borrower:
- Net worth = loan amount
- Liquidity = 10% of loan amount
- Adequate experience (your REO schedule)
While every deal has its quirks and some banks are being more conservative than usual, if you check these five boxes, you’ll be in a strong position to secure financing.
