As published in Scotsman Guide's Commercial Edition, August 2005.
The next time you get an approval on a commercial loan based only on vague property information or a credit score, you may want to proceed with caution. Many brokers have received this kind of approval and committed to a lender only to finally get a “no” or worse, a last-minute change of terms after waiting more than a month. What started as a great loan opportunity turned into a lost one, not to mention the loss of future business from a borrower who was also forced to wait only to lose money on upfront, nonrefundable fees.
Closing commercial loans is not rocket science. It’s a process, and the most-important step in this process is by far the first step — prequalification.
As we all know, there are different levels of analysis. Some lenders just look for property type, credit scores and loan amount and will give you an affirmative answer without looking deeper into the loan file. This is not in-depth analysis. When the proper analysis is done later in the process, problems — many unsolvable at this point — can arise. If you don’t understand how to properly prequalify a loan, you may not know if this is happening until it’s too late.
The good news is that preventing this scenario from happening to you — or happening again, for many of you — is quite easy. The factors to consider in proper prequalification analysis are borrowers’ credit history and financial status; property cash flow; and property value, which includes comparables and cap rates. Whether it is you or your account executive who prequalifies the loan scenario, the buck stops with you, the person brokering the loan. You must ensure it’s being done right.
Credit history and financial status
Most lenders have a requirement for scores, history and liquidity. Personal debt-to-income ratio is becoming less prevalent in commercial underwriting guidelines, but credit history is still a driving force in most cases.
It is important to understand that many lenders will pull a borrower’s credit at the beginning and end of the loan process. Always advise clients not to make major changes to their credit picture that could lower their scores until after closing.
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