Thursday, August 21, 2008

Commercial Mortgage Underwriting Through the Eyes of the Underwriter: The Conclusion

Paperwork Preparation, or The Loan Package

Remember in the beginning we talked about the importance of putting your best foot forward when applying for a loan either for yourself or for a borrower. We talked about having one chance to make a good first impression on the underwriter.

The first step is to know the situation as well as possible so that potential surprises can be avoided (although they will inevitably arise). The second is to make sure that the numbers seem to work for the building as well as the borrower so that the lenders and underwriters time is not wasted with scenarios that have absolutely no possibility of getting funded.

If the minimum credit score for the lender is 600, don’t bring a borrower with a 520 that has no stronger guarantor. If the minimum DSCR for a given building type at that lender is 1.25x, don’t waste their time with a building and loan amount that will result in a DSCR of 1.05x.

While exceptions can be asked for and sometimes granted for aspects of a loan that might not fit the lenders’ specific criteria, use COMMON SENSE underwriting when looking at a potential scenario. You ultimately want to be the person that the underwriter is happy to hear from because they know that the loan scenario you are bringing them will be viable, and not a complete waste of their time.

Not every viable commercial mortgage loan scenario will ultimately get funded, as a wide variety of stumbling blocks can come up un-expectantly throughout the process. The key is to know your scenario inside and out, and build a strong base which will lead to a strong loan package.

Rule 6: As in anything, a weak foundation or base for a loan package will lead to a relatively high probability of the loan not getting funded because it will never get through underwriting.

General Documents Required for a Commercial Mortgage Loan Package

What is the paperwork that you should be prepared with to provide to the underwriter?

1003 or loan application
Credit Report with FICO score (and explanations for any derogatory credit)
Two years personal tax returns (for a full documentation loan)
Two years of property tax returns
Property income and expense statement
Digital pictures of the property
Copies of current leases and rent roll
Schedule of other owned real estate
Contract of sale for a purchase
Copy of insurance and utility bills for the building
Current mortgagor information for a refinance
Agreement to subordinate to a new first mortgage loan if a current subordinate mortgagor exists in a refinance

Conclusion

The underwriter at the given lender is going to assimilate all of the paperwork provided, and make a determination on its validity and accuracy. If everything is found to fit into the lenders parameters and risk tolerances, an LOI or letter of interest will be given to the borrower. The interest rate and loan amount will be at a level commensurate with the DSCR and perceived risk of borrower and building.

The relationship that you will have with the underwriter on the one hand needs to be professional and hopefully congenial, but it has to be understood that first and foremost they are there to protect the interests of the lender. Exceptions on a specific building or borrower will ONLY be made if it can be completely and satisfactorily explained to the lenders satisfaction.

If all of the steps are followed correctly and accurately, your loan will have the best chance of passing muster and getting ultimate approval. Commercial mortgage financing can at time be a frustrating undertaking due to the nuance and potential pitfalls involved, but can be well worth the effort.

Final Rule: Know your lenders, and know for each the type of financing that they do. Never attempt to shove a loan at a lender that is not even close to the lending criteria that they look for. Much of the process comes down to the building to be funded, to the borrower and to the credibility of the person that is bringing the loan to the lender.

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