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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2007

1003s Can Help Commercial Deals

To facilitate the loan process, model your applications after the uniform residential loan application

One of the best ways to get a quick and accurate answer from commercial mortgage lenders on your commercial deals is to submit complete information from the start. When you omit important information, lenders often come back to you with many questions. This only serves to slow down the deal. And it can make you look bad if you have to keep going back to your borrowers with new requests.

If the commercial mortgage lender you’re working with does not have an official submission form, you can refer to a familiar tool to help with data collection. Although the uniform residential loan application (1003) is meant for residential deals, it can be a good model for what information to include with commercial transactions.

Fields to fill

The following are some of the most-important fields on the 1003 from a commercial lending perspective. If you include this information in detail when submitting a commercial loan application, your loan process likely will be much easier.

  • Property type: Include the commercial property type in your loan application — e.g., restaurant, mixed-use, day care, etc. It’s not enough to tell a lender or investor that a deal is “commercial.” Rates and loan-to-value ratios can vary considerably depending on property type, and not all lenders and investors lend on all property types.
  • Year acquired and original cost: Most commercial lenders have the same concerns about deals as residential lenders. On a refinance, it’s important to include the purchase date, purchase price, amount of mortgage being paid off, use of funds and improvements. This information lets underwriters see that the refinance is not a quick flip at a price far more than was just paid. Improvements made can help determine value by combining this number with the cost, in the case of recently purchased properties. In addition, knowing the amount of the existing mortgage helps lenders determine the cash-out amount; most lenders have cash-out limitations and want to know what borrowers will use the cash for.
  • How title will be held: If you know that the property is owned by a corporation, limited liability corporation, trust or partnership, include that information in your application. Most commercial lenders lend to different types of entities, but not all do. The deal potentially can die if the title work shows an unexpected type of ownership. In addition, if a property will be owned jointly with a spouse, partner or family member, it is important to list all title-owning individuals.
  • Co-borrowers: Commercial mortgage companies generally are not as flexible as residential lenders when it comes to deciding whether partners and family members should be included in the deal. If other people are title-owners or integral parts of a business, then commercial lenders typically will want those people on the deal. Don’t assume that you’ll get a better deal by dropping the partner with the lower credit score. Commercial lenders want to know everything relevant to the deal and if key people involved have tougher credit.
  • Purchases: On purchases, it is important to include the borrowers’ and their businesses’ assets unless it’s a no-doc loan. Commercial lenders also need to know the purchase price because there sometimes are minimum property-value requirements. If borrowers need to bring $50,000 to closing, the lender will want to see that borrowers have those assets available. For nonowner-occupied properties, rent rolls and expenses are needed to calculate debt-coverage ratios.
  • Real estate owned: This lets underwriters see how much equity borrowers have in each property they own. Even if the other properties are not being used as collateral, borrowers who have significant equity in other real estate may be given a break on a borderline deal. This is because the extra equity often gives underwriters a stronger comfort level with the deal. It also will give lenders an idea of how much property-ownership experience the borrowers have.
  • Purpose of loan: It is a good idea to include the reason a loan makes sense for your borrowers, especially for refinances. Let lenders know what will be paid off and how much money your borrowers will save. This will tell lenders how the loan will help your borrowers. For example, mention whether borrowers want to buy equipment for their business, invest in other property, clean up tax liens, buy out a partner and so on.
  • Pictures: Although submitting pictures for a preapproval usually is not required, it makes sense to do so whenever possible. The condition and type of commercial properties varies widely, and lenders and investors will look differently at a clean, relatively new, freestanding building as compared to an older building that needs repairs and is surrounded by blighted properties. Pictures can make the difference between an approval and a turndown.

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Most commercial lenders will tell you that it’s fine to call anytime to run a loan scenario by an underwriter or account executive to determine whether a deal is worth pursuing. But if you want an accurate preapproval, it’s important to submit a complete and accurate application. If you don’t, you can ruin your relationship with borrowers and referral sources by getting their hopes up and then not delivering.

In borrowers’ minds, the worst thing you can do is waste their money. Remember that commercial appraisals are much more expensive than residential ones — you don’t want your borrowers to pay for an appraisal only to have their deal turned down when the file is underwritten because of a preapproval that should never have been issued.

 


 


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