Why do other people’s loans get funded and mine don’t?
Have you ever asked yourself that question? Whether you are a broker or a borrower, not every loan you try to close gets funded. There are several reasons why.
Borrowers need to understand the commercial lending environment
This statement has never been more true than during the current pandemic. There’s a certain truth to the rubric that banks only lend money to people who don’t need it. More specifically, banks and other lenders expect borrowers to have a reasonable amount of their own capital invested in the project before they will let you leverage OPM. (Other people’s money.) In the “time of Covid” lenders are also looking for borrower liquidity on top of equity.
If you are new to real estate investing and are trying to do in on your own, you will need to have sufficient liquid capital to make a 25% to 35% down payment, and additional cash reserves for contingencies. You will also, ideally, have a net worth equal to or greater than the amount of the loan you are seeking; excellent credit, and a proven success record in your industry or asset-type.
If you’re a typical CRE borrower, experienced or not, you probably don’t meet all these criteria. There are ways you can shore up your weak points. The easiest way is to bring other people onto your team who have strengths in areas you don’t.
- If you are low in cash, seek cash partners to help with the down payment.
- If your credit is not strong, seek a credit partner who is willing to co-guarantee the debt.
- If you need a stronger balance sheet for contingencies, seek out a high-net worth partner to demonstrate cash reserves.
Shoring up a weak application
As a new borrower, or even an experienced one, you must have your paperwork lined up before you apply for a loan. To apply for any loan, you will have to fill out an application. On the application you state things about yourself and your business, such as your experience, profit and loss history, asset value, etc. In order to be approved for the loan, the lender (using an underwriter) will do two things:
- They will verify the information you state on your application (using various documents such as tax returns, bank statements, resumes, credit reports, etc.)
- They will determine if the deal fits into the risk category that you apply for; or if it fits into their portfolio overall.
While underwriting can be somewhat complicated, the basic things every lender looks for are the ability of the borrower (or the borrower’s business or real estate) to make the monthly loan payment — called debt service coverage; and the ability of the borrower to pay back the principal over time – usually governed by the loan to value ratio. If you understand, and can demonstrate, that you can make a substantial down payment and service the debt you will usually get the loan.
The biggest reason I see prospective borrowers not get commercial loans is that they either can’t support the statements they made on the loan application, or they simply do not fit the loan criteria.
Brokers – know your numbers!
I talk to an awful lot of brokers who are working on deals that they are trying to get funded that will never go anywhere because the deal is not fundable. Brokers, if you sign up a client and agree to represent their loan request to lenders, make sure you know what lenders are willing and able to offer. And make sure your borrower is “ready to go.”
Don’t tell me your borrower needs 100% financing; or tell me, but then I’ll have to tell you, “no.” Don’t tell me your borrower needs two and a half million dollars, (or six hundred thousand, or $30 million,) and then tell me they can’t pay due diligence costs in advance of closing. Virtually all lenders in today’s market expect borrowers to come out of pocket for due diligence costs, such as legal fees, appraisal fees, inspection fees, and sometimes even loan processing and underwriting fees.
I can give you a thousand other examples of brokers representing borrowers who have specific demands that are not in alignment with the marketplace.
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If you are a broker, or commercial real estate investor, and are willing to invest a little time and effort in yourself, SOFIA Capital Ventues can help you achieve spectacular results. CONTACT US NOW!