The Loan Request Package
How to Request — and Get — the Best Loan From Today’s Limited Lending Sources
Today’s lending environment is unlike any I have seen in my 20 years as a mortgage banker. Unfortunately, capital may remain scarce for several more years. In such a competitive marketplace, borrowers may only get one chance with a lender. Approaching the wrong lender for your deal or omitting required data from the request package could mean a quick rejection. The best way to get a loan today is to make it easy for a lender to approve you. The information below will help you determine what you need to succeed.
Who’s Making Loans?
Banks. Strong relationships matter to banks. The likely borrower must live in a city where the bank does business. Banks underwrite loans very conservatively and thoroughly review borrowers’ credit history and the performance other commercial real estate properties a borrower may own. Borrowers also should be prepared to deposit funds with the bank for the life of the loan. Often called compensating balances, it’s usually a percentage of the loan amount.
Loan to value: 65% to 75%
Terms: 5 years
Interest rate: 5.50% to 6.50%
Amount: under $5 million.
Life Insurance Companies. Life companies always have been conservative, which is probably why they are still making loans today. Most of the loan requests are for 10-year loans and the rates vary depending on the strength of the borrower, property location and performance, and loan size.
LTV: 70% range
Terms: 2 years to 30 years
Interest rate: 5.75% to 6.50%
Amount: $5 million minimum, but a few life companies finance properties in the $1 million to $5 million range.
Commercial mortgage-backed securities. CMBS were the leading capital providers until the market crash in 2007. They abruptly exited the market but are now staging a slow comeback.
Terms: 10-years with 25-year amortization
Interest rate: 5.50%
Amount: $10 million minimum
Fannie Mae and Freddie Mac. These government-backed entities have dominated the apartment finance market for many years, and to some degree they continue to offer the best rates and terms compared to other lending sources. But their future is questionable. Both agencies have lost billions of dollars in bad residential loans and there is a lot of pressure to break them up. The agencies could be privatized, combined together, or eliminated entirely. One thing is certain though: Big changes are forthcoming.
HUD-insured loans continue to be a dependable source of capital for apartment owners. They offer financing for new construction as well as for acquisitions and refinances. The process is long, the reserves and fees are high, but this program is worth considering if you have the time it takes to process the loan.
Terms: 35 years with a 35-year amortization
Interest rate: below 4%
Amount: $1 million minimum
Private Lenders. For properties less than 70 percent occupied, in need of rehab, or for borrowers with credit or liquidity issues, private lenders are gaining popularity again. These lenders also can provide cash beyond the current loan balance if the borrower wants to take advantage of an opportune acquisition. These loans are normally paid off after the property stabilizes and the borrower sells or refinances the property. They can fund as quickly as one week but two to three weeks is the norm.
Terms: 6 months to 2 years
Interest rate: 10% - 14%, with 2 to 5 points
Amount: $500,000 minimum
Using a Mortgage Broker
If you have a strong relationship with a bank then you should talk to them about your loan request first. If they say no or the loan amount and terms are not sufficient, talk to an experienced mortgage broker.
Most life companies only work through correspondents so to get a quote from them you will have to go through their correspondent mortgage broker in the region.
You can go to the CMBS lenders direct, but if you don’t have a relationship with the new loan officers (most were let go several years ago) then it makes more sense to let the mortgage broker talk to them. Most brokers have established relationships with CMBS lenders because they send them numerous deals to consider. A broker also can get several term letters from different lenders for comparison.
If you personally know or have a referral for a local private lender, then give them a call. But be careful about calling private lenders without a referral since private lenders are not regulated. Using an experienced mortgage broker eliminates most concerns if the broker has established good relationships with credible lenders.
The Loan Request Package
The key to maximizing the loan amount and getting the best terms is to present the lender with a well-thought-out loan request package. Lenders are overwhelmed with loan requests today and they focus on the deals that require the least amount of time. If they don’t understand your request or if there is missing or incorrect information, they will likely put the deal behind other requests that they can quickly review and quote.
Here is a checklist of information lenders look for:
- Specific loan request including the loan amount, term, and amortization
- Physical address of the property
- At least eight color photos of the property
- Legal name of the ownership entity, including the general partner or managing member names and percentage ownership
- The current rent roll, including tenant names, square footage and space size, move-in dates, and monthly rent
- Physical occupancy for the trailing 12 months (month by month)
- Rent collections for the trailing 12 months (month by month)
- Copy of the standard lease agreement
- Recent rent delinquency report
- Description of construction (Concrete, brick, or metal?) and property details (On-site apartment for management? On-site property management office?)
- Rent comparables for similar properties in the area
- Actual balance sheets and profit and loss statements for 2009, 2010, and year-to-date 2011. Describe any income dips and out-of-the-ordinary or non-recurring operating expenses
- List of immediate repairs
- Description of major improvements made to the property in the past five years
- Copy of a previous appraisal, if available
- Résumé on the borrower, including Web site
- Year the property was acquired and what the acquisition cost was (contract price plus closing costs)
- Balance on the existing loan, along with the lender name, maturity date, and interest rate, as well as a copy of the latest mortgage statement; provide same information for second mortgage
- List of environmental issues
- Description of any exceptions that may show up on title, such as easements, parking, liens, etc.
- Explanation of any irregularities, such as above-average vacancy or unusually high or erratic operating expenses or income
- Indication of the combined net worth and liquidity of the key principals within the borrowing entity
- Description of any past or present loan defaults, lawsuits, foreclosures, bankruptcies, or any other credit issues