Finding a lender that’ll say yes to a loan request is a victory, but it’s only half the battle. To push the deal all the way to funding, mortgage brokers need to avoid several common pitfalls.
It may seem counterintuitive, but pursuing every potential funding deal costs money. For every one that crashes, there may have been a better one that would have funded. By considering the lender’s perspective and avoiding these hazards, it becomes easier to evaluate borrower requests, choose the most promising one and increase the odds of getting the deal over the finish line.
Time and effort spent to prequalify a request before involving a lender significantly increases your likelihood that the deal will fund. This process needs to be surgical and align with the lender’s requirements.
Lenders often receive submissions from brokers with scores of attachments — months of bank statements, old applications, surveys, legal documents, etc. It is not uncommon for a lender to receive 20 to 30 attachments with a submission. Many of these pages are labeled with numbers rather than clearly marked as to their relevance.
While many of these documents may be helpful and even required as the file progresses through underwriting (assuming that it does), it is not an efficient use of a commercial mortgage broker’s time to gather all of these disparate documents on the front end before obtaining a commitment that the deal is fundable. For some lenders, providing too much documentation upfront can be a red flag. It suggests that the file has been shopped heavily and turned down by competitors.
What’s worse, these documents may not answer the fundamental questions necessary to gauge if the file is a potential winner. A one-page preliminary summary that outlines the verifiable information is far more useful at this phase — and certainly less time-consuming. Include the core financial dynamics of the property, such as its estimated value, any liens and mortgages, as well as the asset type, which is always needed to determine the maximum loan-to-value (LTV) ratio. You also should summarize the borrower’s financial health, including their net worth, liquidity and FICO score.
The lender will run an informal debt-service-coverage ratio (DSCR) analysis in the initial review, so it is important to provide gross rental income plus core property expenses such as taxes, insurance, maintenance and homeowners association dues. For an owner-occupied commercial property, include the business owner’s net annual income. This helps the lender to determine if there is enough revenue from the business to service the loan.
The lender will run a population analysis to determine if the property location sits in a desirable metropolitan area or if the location is tertiary, which in turn affects the maximum LTV. It is important to be aware of this contingency and to include the property address in the initial submission.
One of the consistent issues that arises with submissions is the borrower’s estimate of property value. Borrowers often overestimate the value of the property. But all final parameters, including the LTV and loan amount, will be based on the appraised value.
Although the true current value of the real estate may remain unclear until the appraisal is complete, the borrower should understand the potential harm of overestimating value. They may spend money on appraisal, legal, title and underwriting only to discover that the loan is not fundable because the LTV is too high.
Another issue that frequently comes up is insufficient reserves. Often, there are minimum reserves required based on the monthly level of principal, interest, taxes, insurance and association dues (PITIA). Lenders may require reserves equal to six to 12 months of these payments, so it is important to verify that the borrower has sufficient reserves before moving forward.
Although it may be possible to resolve outstanding tax issues by funding them at closing, past-due property taxes may affect the initial LTV calculation. If these issues are only discovered during the title search, it may be too late to steer the deal away from adverse loan terms.
The same goes for past-due IRS taxes. It is not uncommon for IRS liens to be discovered during a last-minute title search after the borrower has spent money on closing costs.
Lenders sometimes can’t provide the rate and terms that a borrower wants for a specific property type and their own unique circumstances. Encourage your clients to remain open-minded and to consider the available options, such as accepting short-term bridge financing to stabilize a property before moving into a lower-interest, long-term loan.
Resolving the borrower’s concerns can be as simple as explaining the advantages of available programs and eliminating misconceptions. For instance, the rate may be higher on a bridge loan, but the term is short and there is likely no prepayment penalty. In this case, the rate may have little impact on the borrower’s bottom line.
Borrowers tend to fixate on interest rates and may balk at the closing table if they don’t understand how their specific issues impacted the loan’s terms and fees. If a borrower’s expectations are too high, it makes little sense to present the file to lenders that cannot match these terms.
Remember that every file has a “story” that plays into the loan approval process. Give the lender a picture of the borrower and their goals, even if it’s one or two sentences.
A broker who is well-versed in the borrower’s story is in a better position to find creative solutions to problems that arise. In a recent example, a borrower fell short on a purchase loan because the PITIA reserves were too low. But she was a seasoned investor with cash available to pull out of other properties that could be used to shore up reserves, and the deal proceeded.
Also, in telling the borrower’s story, don’t get swept up in a sea of irrelevant information. What a lender needs to know for an initial determination could be accomplished in a 10-minute interview with the client.
Borrowers should be careful not to do anything during the loan underwriting process that affects their credit or financial condition. It has the potential to kill the deal at the finish line.
In one instance, a prospective borrower was slow to provide underwriting documentation, which delayed the loan and required a second credit check. By then, the applicant had defaulted on other payments and lowered their credit score below the lender’s qualifications. The deal died.
A similar problem arises when the borrower stops paying their mortgage during the underwriting process because they incorrectly assume that it will be paid at closing. In some cases, a 12-month mortgage history that extends right up to the loan funding may be required. Last-minute defaults or late payments may disqualify the borrower.
Borrower cooperation is imperative during the underwriting phase. A borrower’s hesitation to provide documentation is seen as a red flag. The same is true when the underwriters uncover discrepancies in the documentation and need additional information.
If the borrower is behaving belligerently, the mortgage broker needs to make a judgment call on whether to proceed, weighing the likelihood of succeeding against the reputation the broker wants to maintain with the lender. More often, however, the borrower merely gets overwhelmed. This problem can easily be resolved through proper communication. A kickoff meeting between the borrower, the broker and the lender’s underwriting team or representative can alleviate concerns and keep everyone on the same page.
Once the process is complete and the loan is ready to fund, some deals still can fall apart at the closing table. A borrower can get skittish when they read the settlement statement. Seeing the fees in black and white, or simply placing their signature on the documents, can be upsetting. These feelings need to be mollified and a little handholding is sometimes required. This is where the relationship with the borrower can really pay off, if they’ve come to trust their broker and know someone is in their court.
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Some funding deals will collapse no matter how cooperative the borrower is or how diligently a broker works to resolve problems. But following these steps will significantly increase the likelihood that deals fund and the broker gets paid for all their hard work. ●