Understand the specifics of the underwriting process and avoid unpleasant surprises

Jeff Rauth, vice president, SB Capital

As published in Scotsman Guide's Commercial Edition, July 2012.

When it comes to loan underwriting, the devil is in the details. Different underwriters often have different requirements for funding, especially for less-than-perfect or unusual loan requests. These requirements easily can make or break a deal if they are overlooked by originators. Commercial mortgage brokers must familiarize themselves with the specific requirements and guidelines of lenders, and understand that lenders also seek particular loan types for their portfolios. As a result, what one lender considers a bankable deal, another may decline right away.

There are several major areas that every lender may treat differently during underwriting. Knowing how a lender handles these items may mean the difference between a closed loan and busted deal.

Developing a solid understanding of various underwriting processes is critical for commercial mortgage brokers who put their reputation, income and time on the line when they submit client transactions to lenders. A mortgage broker often only gets one shot with a borrower, and if a lender sends the client down a long path of underwriting and loan processing only to result in a declined loan, this client likely will be lost for good.

If the process goes without complication and the loan is closed, however, this will reinforce the broker’s position as a knowledgeable consultant and strengthen the client relationship, which means not only a closed loan, but also a potential source of referrals.

Keep these five commonly missed underwriting points in mind as you package deals for lenders.

1. Personal needs

The calculation of personal needs — sometimes referred to as the owner’s draw account — is one of the points that significantly vary from one lender to the next. Personal needs are the amount an underwriter allocates for the borrower’s personal expenses, or the amount of income considered enough for the borrower to live on.

To determine this amount, lenders typically review the borrower’s credit report and personal financial statement. Then they add a margin to this amount to cover costs that are not listed on the credit report, like entertainment, food, fuel, etc. The margin lenders use is a reflection of how aggressive they are at funding deals — the lower the margin, the more aggressive the funding.

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