Things to Consider When Talking to A Commercial Lender
Before you put an apartment building deal under contract, you should clearly understand your potential lenders’ loan terms and underwriting criteria.
Imagine this: You put a deal under contract and you assume a down payment of 20%, and you later find that you’ll need to put 30% down. Or that you don’t personally qualify for the loan and you’ll need to find a co-sponsor. Or that the lender requires a 6-month reserve that you didn’t count on.
While sometimes ignorance is bliss, in this case these kinds of surprises could cost you a deal. And when you’re doing a deal, you don’t want surprises like these.
The lesson learned is this: clearly understand the terms of the potential loan and how the lender will “underwrite” the deal.
To “underwrite” is a fancy term that refers to how the lender assesses the risk of project, what they require of you as the sponsor to mitigate those risks, how it satisfies their lending guidelines, and the ultimate terms of the loan.
In order to understand your lender’s underwriting criteria, make sure you network with potential mortgage brokers or lenders long BEFORE you start making offers on deals.
10 Questions You Need to Ask Your Commercial Mortgage Broker
In your interview with your commercial mortgage broker, ask them these 10 questions:
- What are the basic terms I can expect for a typical loan? Specifically, what loan-to-value (LTV), interest rate, term, and amortization can I expect?
- Is the loan non-recourse, or does it have to be personally guaranteed?
- What are the costs of the loan? Specifically, what are the origination fees (typically 1% of the loan), and what is the cost of 3rd party reports, such as the appraisal, structural and environmental reports, and legal fees?
- What size loans do you typically do, and in what areas?
- What are the prepayment penalties if you decide to refinance or sell before the term of the loan?
- What are your liquidity and net worth requirements? Typically the lender will require the sponsor(s) to show liquidity of 10% of the loan and a net worth equal to the loan balance.
- Do you require any reserves or minimum account balances? Some lenders want you to deposit 6-9 months of interest payments into an escrow account and/or keep a minimum balance in the bank account. Some also want you to bank with them as a condition of the loan.
- What is the typical time to close from the time I order the appraisal?Normally loans take 45-60 days from the time the appraisal is order to close. Make sure you know the timeframe for this lender.
- How do you define a “stable” asset? Typically assets that are at least 80% occupied are considered “stable” and anything less occupied is considered “distressed.” If you’re talking to this lender about a conventional loan for a “stable” asset, make sure you know what they consider “stable.”
- What kind of loan products do you provide? Lenders could provide one or more of these loans: conventional, Fannie Mae/Freddie Mac loans, FHA/HUD loans, bridge loans, and/or construction loans. The more products a broker can provide, the better.
Keep copious notes, and then add the answers to each of these questions to a spreadsheet where you track the nuances and terms for each lender. Do this for 3-5 lenders and you’ll get a good idea of what’s “normal” and what might be a bit unusual.
Now that you have the answers to all of these questions, you will better understand your lender’s requirements to ensure you qualify for the loan and you know the actual terms. Then, once you have a deal under contract and time is of the essence, you already have a relationship with the broker, you already know what terms to expect, and are confident that you have a very good chance of being approved for the loan. Following these steps systematically will dramatically increase the chances of closing the deal.