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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2005

Gunning for Quality Full-Docs

Take the proper steps to submit a full-document loan and offer clients more options

Since the advent of stated-income/stated-asset (SISA) loans, brokers and borrowers have enjoyed a streamlined approval process for small-balance ($100,000 to $1 million) commercial loans.

The downside to SISA programs, however, is that interest rates normally are much higher than with full-document loans. Plus, the appraisal process tends to be conservatively skewed toward the lender. In many instances, the loan closes at a lower amount than what was requested. This is frustrating for brokers and their clients.

If brokers are well-organized and if their clients can show adequate cash flow to service the proposed debt, obtaining a full-doc loan shouldn’t be difficult. Banks, insurance companies and conduits are just a few of the traditional lending sources to whom brokers may bring their full-doc clients.

Debt-service-coverage ability

Brokers often want to pursue SISA loans because clients’ financial statements do not reflect their real financial picture or because clients cannot justify their debt-service-coverage ratio (DSCR). In many instances, though, clients may have other investment properties or income sources that a lender may consider part of a global-cash-flow analysis.condellographic

For example, take a pizza-shop owner who operates out of a mixed-use building — an owner-occupied retail unit with five apartments above the store. To refinance, the owner could go full-doc because the property can demonstrate adequate cash flow from the generated rental income.

Although SISA lenders do provide a necessary product and service, many brokers who submit a full package of clients’ financial information can expect to quote their clients an interest rate that is lower by at least 300 basis points.

Most full-doc lenders require a DSCR of at least 1.2-times coverage. When reviewing a typical commercial real estate project, most commercial lenders employ the following analysis (in this case, for a 20-unit apartment building) to calculate DSCR:

Always a proper package

Commercial-loan brokers should develop a uniform loan-submission package for every loan they plan to broker. Though different items may be required for each loan request, there is a set of universal documents to submit. Having them ready each time will save the lender, broker and client a lot of time.

In most instances, brokers seek to place real estate secured commercial loans, for which the following documents will apply:

  • Loan-submission summary, which provides the requested loan amount, names of proposed borrowers, use of proceeds, complete property address, estimated value, property type (apartments, mixed-use, warehouse, etc.) and a current income and property-expense summary (generated rental income and operating expenses);
  • Typed 1003 loan application signed by the client or a completed personal financial statement;
  • Current tri-merged credit report;
  • Two years of complete personal 1040s for the applicants or guarantors;
  • Two years of business tax returns and/or annual financial statements (if the partnership, limited-liability company or corporation is the borrower or guarantor);
  • Copies of all leases;
  • Digital pictures (if available);
  • Copy of a previous appraisal on the subject property, if one exists; and
  • Canceled checks, copied front and back, for the past 12 consecutive months for any lender that will be paid off as part of the proposed loan.

Although this may appear to be a lot of information, it should not be difficult to get. Many clients’ accountants can e-mail the tax returns directly to the lender or broker, thus speeding up the process. Brokers may want to scan financial information to submit to the lender.

Making a good first impression is important should brokers wish to do business with these lending sources in the future. After all, providing the best interest rate for your client is your major objective. A happy client will almost always guarantee future business referrals.


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