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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2005

Back to Basics

Brush up on all the right steps to closing a commercial loan

No matter how involved you might be in marketing or closing commercial loans, it never hurts to review the fundamentals.

Say that an auto-repair mechanic calls and wants to pull some cash out of his shop. He has been in business for more than 10 years, has good credit and doesn’t owe anything on his property.

Let’s look at all the steps involved in bringing his loan to closing.

Qualify your candidate.

He has already given you some of the basics — that he is a good-credit borrower with a free-and-clear property. The next information you need is about the property and the loan. How much is the property worth? How much does he need, and what does he need the money for?

Let’s say the property is worth $500,000, based on an appraisal the owner had three years ago when he thought about selling the store. He wants $250,000 for renovations. This is an environmentally sensitive property, and our next step is to find out if there were any gas tanks on the property. If so, make sure that prior owners had the place cleaned up and that they provided enough proof.

Ask about income.

Your client has been an owner/operator for many years, and he pays all his bills on time. He has an all-cash business, however, and there are losses on his tax returns. This means that you likely have a stated-income/stated-asset (SISA) deal on your hands. A full-document loan may not work because the owner can’t show positive personal tax returns.

After you explain to the shop-owner the difference between SISA and full-document loans, you can give him some approximate rates and terms based on what he has told you. Emphasize that these are only estimates because you do not have a file on your desk.

With all the income and collateral questions answered, you can now take the next step.

Start working on the application.

Keep in mind that if the borrower did not have an appraisal done, it is important to ask the correct questions to confirm the value. This is especially true with a facility like an auto-repair shop. Ask what he paid for the property and when.

If he bought it last year for $300,000 and he thinks it’s worth $500,000 today, this is unrealistic, unless he completed $200,000 worth of improvements. You also can ask the value of similar properties in the area. To confirm, find a local Realtor who will give an opinion of the property’s value.

If you don’t do some homework in the prequalifying stage of the deal, the deal could die at the end. After all, most optimistic borrowers will overstate their property’s value.

Make sure you completely fill out Page 2, the assets page. Because you are going with a SISA loan, this thorough information will help make it easier for an underwriter to approve your loan. SISA lenders evaluate the credit, property type, condition and the borrower’s stability.

Everything looks good so far. Remember, the income and assets information provided by the borrower is “stated” and will not be verified. Tell the borrower you will get back to him within 48 to 72 hours with an offer in writing.

Pull a tri-merge credit report. We’ll say that his mid-FICO score is 730 — not too bad. You are now ready to submit the application to your wholesaler. You fax the lender-specific application, 1003 and tri-merge information. Again, no financials or tax returns are required.

Forty-eight hours later, your approval comes back. The deal looks good.

Write up the approval for your borrower.

Include all the terms, including your fee. Contact the borrower, discuss the deal and fax him the offer to review. If he calls you to say he is OK with everything but is upset about paying the points (he didn’t have any points on his residential mortgage, after all), now is your opportunity to educate him.

Explain that commercial lending generally involves greater risks than does residential lending. Greater risk means greater expense. Gently let him know that you might have been able to do better, but that his particular situation made the loan more difficult.

This discussion presents a great opportunity to throw in the “ace in the hole” question: Have you tried your local bank? The borrower will likely pause before he admits to you that his bank turned him down, despite all his years of business with it. Banks simply have stricter guidelines.

With any borrower, this is a good time to explain just what an important role you play. Because you specialize in financing individuals with unique needs, you require fees. Borrowers like the auto-shop owner might need to think about it. Let him know you are available for any questions or concerns he may have.

Two days later, a signed approval shows up on your desk.

Start processing the loan.

Now the fun begins. You must find an Appraisal Institute-certified appraiser from your wholesalers’ approved list. After contacting a few appraisers from the list, you find the best deal with an appraiser who charges $3,000 with a four-week turnaround time. The borrower will likely understand the cost, given that he had to pay for an appraisal before.

Start collecting all the documents from the borrower — licenses, insurance information, proof of identification, etc. In conjunction with the appraisal and collection of documents, you must order a title on the property.

Four weeks later, all the documents are in, the number on the property is what you expected, and the title is clear with no encumbrances. The lender issues the final U.S. Department of Housing and Urban Development (HUD) statement for the borrower’s approval.

Attend the closing.

Arrange for it one day later at the borrower’s place of business. One day after that, you receive a check for $7,500.

Then the phone rings again ...


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