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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2005

Checklist for Mortgage Brokers

The more you and your borrower know about the lending process, the better

Mortgage brokers who educate their clients about the lending process provide a great service by letting their clients know what to expect.

A borrower can better choose a lender by understanding what lenders face when they are reselling loans, raising funds and facing external and internal lending restrictions and parameters. It also helps to understand how lenders make money, what their liquidity is and what their lending preferences are (i.e., whether they prefer retail or industrial over multifamily).

Knowing a bank’s annual loan-origination goals also can help a borrower get a loan. For instance, if a lender targets its annual loans primarily to industrial properties and those targets are falling behind, the lender may be more prone to funding an industrial building.

Below is a list of 10 things to consider, for your benefit and that of the borrower, before the loan process gets started:

  1. Debt-service-coverage ratio (DSCR) vs. loan to value (LTV): Aggressive LTVs are great for buyers. Underwriters, though, can quote a great LTV initially and drop the LTV upon discovering that the DSCR isn’t there. Unless borrowers know this early in the loan process, they could be disappointed if it happens.

  2. Appraisals: Low caps are the norm in this hot seller’s market. Appraising in an appreciating market can be difficult because higher prices are set by new transactions before comparable sales can justify them. The lender can say no to the transaction price. This leaves the borrower with a smaller loan based on the lower appraisal value and not on the transaction price.

  3. Third-party reports: The prices are increasing. American Land Title Association surveys have vastly varying prices. Appraisers are in great demand. If you want an appraisal fast, you will be charged huge premiums to go to the front of the line. In addition, lenders require more reports in an appreciating-report-cost environment.

  4. Comparable sales data: Getting this can be tough. Often, institutional buyers transact privately, and it can be hard to track where the market is going. Not only are sales prices constantly pushing up ceilings, but many deals also are transacting off-market. Brokers must work to find the appropriate information for their clients.

  5. Rate locks: One percent to 2 percent of the loan amount is deposited with the lender to ensure a lock on the current rate. With the difficulty of getting loans, remind borrowers that the money is not recoverable if they cancel.

  6. Lender integrity: You must know which lenders to trust and which to avoid. Verify as much information as you can. 

  7. Fast market/competitive speed: Brokers must be quick in their offered closing time as well as in their pricing largesse. Setting underwriter expectations is key to a successful transaction. But don’t promise anything you can’t deliver.

  8. Carve-outs: More borrower guarantees and less lender liability are the norm.

  9. Tougher reselling standards: Lenders lend to make money. To lend out dollars again, they need to sell their loans quickly to be recapitalized. Selling mortgage pools in competitive markets means that standards are tough. Although more loans haven been originated in the past few years, lenders are receiving fewer profit margins for their loan pools than they had received previously. 

  10. Other requirements and considerations: It’s helpful for borrowers to learn upfront that banks will increase a property’s total operating expense if property-owners manage the property themselves. In addition, reserves, added operating expenses, additional maintenance, capital improvements, future tenant rollover/loss and other variables can lead a lender to decrease a property’s pro-forma revenues or increase expenses to analyze the risk more conservatively.


 


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