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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2016

Win Over Your Underwriter

Always on guard against credit risk, lenders appreciate complete, straightforward loan packages

Win Over Your Underwriter

As lenders’ last line of defense, underwriters are paid to ask tough questions and make tough credit decisions. The chances that the decisions will be in your favor are better if you put together loan requests that are well-thought-out and address potential problems up front.

Although the condition of investment property and the terms of the deal ultimately

decide whether a commercial mortgage loan will be approved, there are steps originators can take to improve their chances during the underwriting process.

Underwriters receive far more loan requests then they are able to fund and, like most others in the mortgage business, have little time to wade through pages and pages of documents to understand the key factors of a loan.

There are essential points that underwriters take into account in every loan proposal they consider, and the quicker they’re addressed, the better. Successful loan applicants present information as completely and directly as possible, in a format that’s accessible and easy to understand. Start with an executive summary of the deal, followed by a table of contents addressing the main topics you will be covering in your presentation. You may need detailed information and supporting documents, but save them for later — and don’t submit them as part of your summary.

Property types and markets differ, but in the vast majority of cases, underwriters will want to know specific information in a few broad categories, including the borrower, the property, its location and the business associated with it.

The borrower

Start with the most basic information about your applicant: his or her credit rating. Agency lenders (such as Fannie Mae and Freddie Mac) will expect a credit score of 680 or higher, and individual banks may have different requirements. In any case, know your borrower’s credit scores upfront and be prepared to discuss and explain any and all credit deficiencies, including delinquencies, foreclosures, short sales, bankruptcies and judgments. Lenders will often consider delinquent credit with acceptable explanations and compensating factors, but a loan submission without a solid written explanation is a certain turndown.

In addition, lenders have minimum net worth and liquidity requirements that underwriters will want to verify. Typically, commercial borrowers are expected to have a minimum net worth equal to the loan amount, and cash liquidity equal to six to nine months’ worth of proposed mortgage payments. Likewise, underwriters do not want to see borrowers use all of their cash liquidity as the downpayment for a purchase. Lenders expect to see sufficient cash reserves to handle unexpected expenses that may arise.

Finally, let the underwriter know about the customer’s professional background. Specifically, address his or her level of experience owning or managing properties similar to the one being financed and, if that experience is lacking, explain what you are going to do about it. Lenders are wary of first-timers with no appropriate experience, but may be willing to compensate for that lack of experience by requiring that the borrower employ a professional property manager, for instance.

The property

Many conventional lenders will look for cash-flowing and income-producing  properties. As a result, they’ll want to know the condition of the property. If it has been renovated and is in good repair, consider demonstrating that with pictures. If it needs major rehabilitation and suffers from deferred maintenance, make a realistic determination for the lender of whether it’s rentable in “as-is” condition, as well as providing an estimate of the remaining useful life of the property.

Asking the right questions upfront eliminates weeks

or months of processing a loan that will not close.

All of these issues need to be vetted upfront and explained in detail. Properties in need of repair, or properties that are not cash-flowing, will probably require a short-term bridge loan from a private bridge lender.

Lenders want proof that the property conforms with municipal zoning regulations and has a certificate of occupancy and, depending on the property’s use, applicable licenses and permits.

Less common, but potentially very important, are documents related to environmental issues that may affect the deal. Prospective lenders will have questions if the property is located next to or near a gas station, dry cleaner, heavy industrial facility or manufacturing plant. If there has been a Phase 1 environmental site assessment or condition assessment conducted on the property, forward those reports, along with other environmental inspection results, to the lender as part of your application.

The location

All underwriters have minimum- population standards that they must follow. Some lenders require a Metropolitan Statistical Area (MSA) of 250,000 or more; others as little as a population of 50,000. If the property is located in a rural area, make sure to understand the lender’s demographic requirements upfront. That demographic information is available from a number of Internet sites, including the U.S. Census Bureau website.

The U.S. Labor Department has current information about an area’s employment and/or economic base. A lender will be interested in employment stability and whether there are a variety of industries in a given area, as well as any factors that are unique to a given region, such as the presence of a military base and the likelihood that it will remain operating.

The business

If you’re trying to finance a multi-unit property, examine and study the rent roll. The vacancy rate is essential, of course. Also, let the lender know how long the tenants have been at the location, how long they have been in business and whether they’re local unrated tenants or national credit-rated tenants.

A proper loan submission will present that information in a lease-abstract summary that, in addition to the mentioned items, includes rent, square footage, common charges, and the start and end dates of rental leases.

In addition, you’ll benefit from submitting an operating statement, as well as an analysis of what’s in it. The statement should show revenue and operating-income trends; vacancy rates and expenses, including fees for management; and repairs.

Once you’ve established the property’s net operating income, you can use that figure to demonstrate to the lender your financial ability to pay the mortgage. Calculate your debt-service coverage ratio (DSCR, or net operating income divided by your debt costs). Although it varies by property type and lenders, you’ll need a minimum DSCR of 1.2 for apartments and 1.25 for other commercial mortgages.

It might seem like a lot of work to address all of these issues upfront. Commercial mortgage brokers who take the time to completely analyze and prepare a submission in advance, however, find that their successful closing rate is much higher than average. Further, asking the right questions upfront eliminates weeks or months of processing a loan that will not close. Lenders will appreciate your diligence and will look forward to receiving your submissions. 


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