As published in Scotsman Guide's Commercial Edition, September 2009.
Whether you're on your first commercial deal or your 50th, you likely started in the business the same.
Most mortgage brokers begin by doing one transaction at a time, stumbling through their first 10 to 20 commercial loan applications as they pay their tuition to the school of hard knocks. Although you certainly will learn from each failure, lender contact and missed opportunity, it ultimately is an expensive and time-consuming education.
In the challenging commercial finance market, it may help new brokers and those refreshing their knowledge to have a guide to refer to when presented with a loan opportunity.
Here are nine steps to consider with any commercial loan transaction.
1. Screen the deal
When presented with a deal, you first must interview your clients and receive key items to determine if you should proceed in securing financing for their project. It's helpful to have a spreadsheet with key elements that can help you qualify a potential transaction in as few as five minutes.
Your spreadsheet should include:
The investment property's gross income, operating expenses -- don't count depreciation or capital expenditures -- and net operating income (NOI) from the most-recent tax return;
The current market rate and amortization for the type of property and loan program your client seeks;
The loan amount requested; and
The debt-service-coverage ratio (DSCR) the lender will most likely require.
This information will help you determine if the property can service the debt and meet your lender's primary guidelines.
Also collect the following from your clients:
The adjusted gross income from their most-recent personal tax return
Their credit scores -- 650 to 700 is a rough range for minimum scores lenders require
Their current liquidity -- look for 10 percent of the loan amount
Their net worth, which should be greater than the requested loan amount
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