Proposed LW

Detailed Description of Proposed LW

The Proposed LW serves as a primary indicator of the "cushion" a lender has in the event of a borrower default. Because commercial properties are subject to market fluctuations, lenders use this percentage to ensure that the debt does not exceed a specific portion of the property's total value. It is essentially the Loan-to-Value (LTV) ratio tailored to the specific proposal stage of a mortgage application.

Key aspects of Proposed LW include:

• Risk Assessment: A lower Proposed LW indicates that the borrower has more "skin in the game" (equity), which translates to lower risk for the lender. Conversely, a high Proposed LW suggests a higher risk of loss if the property value drops.
• Underwriting Thresholds: Most commercial lenders have strict internal caps on Proposed LW. For stabilized assets like office buildings or retail centers, lenders typically look for an LW between 65% and 75%. For riskier or unproven assets, this number may be lower.
• Determining Interest Rates: The Proposed LW directly influences the pricing of the loan. A lower ratio often qualifies the borrower for more competitive interest rates and better terms, while a higher ratio may result in "risk-based pricing" with higher costs.
• Appraisal Contingency: The word "Proposed" is used because the ratio is often based on the borrower's estimated value or a preliminary evaluation. The final approval is usually contingent on a formal third-party appraisal to confirm the actual "Worth" of the property.

Calculation of Proposed LW

To calculate the Proposed LW, the lender uses a simple formula:

(Requested Loan Amount / Appraised Market Value) x 100 = Proposed LW %

For example, if a borrower is seeking a $7,000,000 loan for a warehouse that has a confirmed market worth of $10,000,000, the Proposed LW would be 70%. If the appraisal comes in lower than expected, the lender will likely reduce the loan amount to maintain their required LW ratio, requiring the borrower to provide more equity at closing.