A lender expects that a broker has a complete picture of a transaction before submitting a small-balance commercial financing request. A well-organized and documented package will always expedite a response from the lender.
However, many times lenders identify areas requiring additional clarification within a request, and the deal is then put on hold until the right information is provided.
There are several common reoccurring pitfalls lenders find brokers run into during a loan submission when the relevant facts are not present.
- Incomplete applications
- Incorrect applications
- Incorrect property evaluations
These may not seem like huge problems, but they can greatly delay an application or cause it to be denied. To avoid these pitfalls, there are 3 steps you can take to help ensure your submission is complete and accurate.
3 Steps to Avoid Pitfalls during a Loan Submission
Before submitting a small-balance commercial deal to a lender you should identify some basic information. Asking your borrower the right qualifying questions will help ensure you submit their deal to the right lender the first time. As long as you have a good checklist, you will be able to quickly identify the qualities of your borrower’s deal that will best match a lender’s requirements.
1. Ask the Right Questions
One of the most important things you can do before submitting a deal to a lender is to complete some basic underwriting. The first step to accomplishing this:
- Uncover your client’s motivation for financing
This is a great way to get the conversation started with your borrower. It also helps to establish the pool of lenders that will be interested in meeting their financing needs. They should be able to tell you the reason(s) why they are looking for financing, and you should be able to listen for their REAL needs. The purpose of this exercise is to get to a point where you can clearly communicate to the lender what the borrower’s motivations are for financing.
- Obtain a better rate and terms
- Pay off a balloon note that is coming to maturity
- Purchase a property
- Other investment opportunities
- Buy out a partner
- Increase liquidity and reserves
- Help solve other debt
Once your borrower has answered what is motivating them for financing, next ask why. Knowing which of these common scenarios your client falls into can help you quickly identify a possible lender. But knowing the specifics as to why they fall in this scenario will help you even further.
Keep lenders’ program requirements in mind when reviewing these initial questions. You should be able to quickly remove a few of the more traditional options from your list if you notice any unique circumstances with the property or borrower at this point.
2. Gather Supporting Information and Documentation
Supporting information and documentation pertaining to the borrower and property will only strengthen your understanding of the deal. Official documentation ultimately gives you the real numbers and information you will be submitting to a lender.
Before submitting a deal, gather the following:
- Current mortgage balance, due date, and maturity or balloon date
- YTD operating statements
- Prior two year’s operating statements and tax returns
- Current rent roll that includes at a minimum: tenant name, amount of monthly rent, square footage, lease commencement and expiration dates
- Borrower’s credit score and/or tri-merge credit report
- Letter of explanation for any derogatory credit matters
- Value of the property
Many lenders have an application for brokers and borrowers to use to capture all of the necessary information. If you ask your borrower to fill out the application, make sure to review it in its entirety before submitting to a lender.
Your borrower may not know enough about the transaction process to effectively answer all of the questions on an application. If any required information for the application is missing, the process will be delayed. Assist your borrower in completing the application to verify that the application is complete and will meet the lender’s requirements, thus enabling the lender to properly evaluate the borrower and the transaction.
Silver Hill has a library of forms you may need during a loan submission for you to use as a resource.
3. Be Thorough and Communicate
The basics will only get you so far when trying to gather all of the necessary information needed before you submit a deal. Once you’ve answered some starter questions and reviewed your borrower’s supporting documents, you should identify a few more details to ensure you’re getting the full picture.
Answering questions and communicating issues concerning any topics like these below will help avoid delays in underwriting and drafting legal documents.
- Have you visited the property and the surrounding neighborhood?
If you haven’t seen the property yet, make sure to get current pictures of the outside and inside. For example, applications can be stalled during the appraisal phase if the borrower misreported the progress of property renovations. To avoid occupancy surprises, review lease commencements to verify occupancy status.
- Are there environmental issues or deferred maintenance issues?
If these issues are not addressed at the beginning of the loan process, delays could take place depending on the cost and severity of the problem. If there are major concerns a deal could be placed on hold until the issue is resolved, or lenders may hold back money until repairs are completed.
- Do you have a vesting tree that documents ownership structure?
Providing a vesting tree before a title search is ordered will eliminate any surprise liens or deed mistakes still associated with the mortgage. If there are liens, most lenders require that the borrower pays those off on or before the deal’s closing date. If the borrower was not aware of the liens, they may not be able to cover the costs right away – which ultimately delays closing.
- Who are the principals and what are their ownership percentages in the borrowing entity?
Most lenders require that principals with at least 25% ownership must either sign the loan documents or a corporate resolution authorizing the refinancing. If one of principals does neither, the deal will be delayed until the required information is submitted to the lender.
- Has the borrowing entity been formed in cases of purchases?
This usually does not take much time, but it should be done before moving to closing. The formed entities can be LLCs, partnerships or trusts.
- Is there an executed and valid purchase and sales agreement?
Purchase and sales agreements usually have expiration dates, so a new agreement will be needed if there was a delay during the loan process that caused a deal to be pushed past the expiration date.
- Does the application or personal financial statements document sufficient liquidity?
This is basically a cash flow analysis. Does the borrower have enough money to cover the loan expenses? Rent rolls or a property operating statement can help provide this information. Simply put, if the borrower doesn’t have the cash flow, then the chances they receive funding is little to none. Make sure to review this information before submitting a deal.
- Has the borrower filed tax returns?
If a borrower applies for tax return extensions until the last possible date, they have until around October 16th to file their taxes. Once this date has passed most lenders will not approve a deal with a borrower who did not file tax returns. Accordingly, it is important for the borrower to resolve any filing delays and get their taxes done in time before a lender will proceed to closing. A lender may also be curious to know if there are any underlining issues if the borrower has not completed their taxes.
- Are there issues that have precluded the borrower from obtaining financing?
Most borrowers are looking for the best deal for their situation. Some factors that a lender may find which have precluded the borrower from obtaining financing include derogatory credit events, tight cash flow or title issues. If any of these factors relate to your borrower, address them before hand and gather the right documentation to prove that they will not have an effect on this deal.
- Can the borrower provide documentation of recent capital improvements to the property?
Usually, lenders are looking for descriptions from 6 months to 2 years. Having this documentation helps deals looking for a cash-out. For example, if the borrower purchased a property 1 year ago for $500,000 and now wants a refinance cash-out at $600,000, they would need to show the improvements made to the property. Rent rolls can help prove this. It’s important to request this information the first time you meet with your borrower to avoid going back and forth once the loan process as started.
- Have you verified that there are no open permits or mechanic liens that need to be resolved?
If there are open permits or mechanic liens that need to be resolved, the duration of this delay is dependent on other parties. It takes between 7-10 business days to receive a title report for the property. If issues are discovered, the borrower will have to contact the city council or government to get the problems corrected, and there is no telling how long this could delay the process. This pitfall could also force the borrower to pay more upfront at closing or accept a lower loan amount.
If you follow these three steps before submitting a small-balance commercial deal, you will avoid the common pitfalls many encounter before completing a loan submission. Remembering these steps every time you submit a deal will help you, your borrower, and the lender close your deal accurately, smoothly and quickly.
If you have a client who could benefit from a Silver Hill Funding program, become an approved Silver Hill broker and submit your deal to us.