7 Steps to Make Sure Your Multifamily Loan Gets Approved
By Terry Painter, President of Apartment Loan Store and author of The Encyclopedia of Commercial Real Estate Advice
This should never happen but does far too often. Why? Mostly because of loan officers who are overworked and are also salespeople that want to take the deal off the street fast. If only they would take a few more days to prequalify the borrower and get in all the property financials needed. But it also occurs because the borrower has applied for the wrong loan – one that they or the property don’t qualify for.
The only way I know to keep this from happening is to prequalify yourself. Did I just say prequalify yourself? Yes! You need to take charge of the loan process by screening the lender for the 7 pre-qualifications that all commercial loans have. All it takes is for one of these to fail and your loan is likely to hit a brick wall. Here’s what you need to ask the lender and watch out for:
#1. Borrower Qualify – Many borrowers think they have better credit than they do. Before you apply for the loan, pull all three credit bureaus yourself – Experian, Equifax, and Transunion – for free at annualcreditreport.com. If there are any dings, be prepared with a solid explanation. Ask the lender the minimum requirements for credit score, net worth, post-closing cash, annual income, and experience. If tax returns are required, share your net income, not adjusted income.
The reason the borrower mentioned above got their loan denied is because all lenders pull a background check. The credit union found a DUI from 16 years prior that had resulted in a criminal conviction. The borrower checked the box saying they did not have any convictions and the lender felt they had been lied to. The borrower thought after so many years it would never come up. Be sure to disclose bankruptcies, foreclosures and fill out 100% of the application accurately. Telling little white lies on your mortgage application is a federal offence.
#2. Property Location – Almost all commercial lenders are fussy about property location. Community Banks and Credit Unions like to lend in their own backyards and prefer the borrower live close by. National lenders usually like larger MSAs and will only lend to borrowers who have prior experience in that market. All lenders like safe neighborhoods, and far too often wait until final underwriting to pull a crime report. The last thing they want to worry about is having to wear a bullet proof vest to inspect the property during a foreclosure.
#3. Property Income – Far too often commercial loans get off to a poor start with scanty property financials. You need to be armed with actual income and expenses, not the fluffy projected ones the listing agent might be selling. So many loans fail when the lender gets all the financials in and there’s not enough cash flow. Look up the current mileage rate for property taxes with the county as lenders do and adjust upward if necessary. Few know that most lenders underwrite to a higher stressed interest rate thinking rates might go up in the future. This lowers the loan amounts and can kill our loan.
#4. Occupancy – Did you know that multifamily properties are considered distressed if they have lower than 85% occupancy which is a minimum for most community banks. Fannie Mae, Freddie Mac, and HUD require 90% physical occupancy for 90 days. But where occupancy kills deals is most often due to economic occupancy which is based on actual rental collections over the past 12 months.
#5. Tenant quality – Lenders know that just because tenants are on the rent roll it doesn’t mean they are all paying rent. So, most do a rent collection report for the past 6 -12 months – especially when they find rent rolls averaging more gross rental income than monthly P&Ls. Better for you to point a finger at slow paying and no paying tenants which makes you look smart and saves the lender from uncovering this. And don’t forget that many lenders including Fannie and Freddie have a maximum percentage of Section 8 tenants they allow.
#6. Lease Quality – Most multifamily lenders prefer most tenants to be on annual leases because tenant roll over risk is higher on month-to-month occupancy.
#7. Property Physical Condition – Far too often the borrower thinks the property is in better condition than it is. Then the lender’s property condition report comes in a month later and the cost to bring the property up to minimum standards kills the loan. Be sure to walk every unit with a contractor who will see stuff you might miss and can give you an estimate of cost to remedy.
Fortunately, if a loan is about to die in the eleventh hour, the lender doesn’t want to lose the deal any more than you do. After all, they have likely put in over 50 hours and hate working for nothing. A skilled loan officer knows how to use mitigators to overcome many of the obstacles mentioned. They know that extra liquidity along with a good neighborhood, high economic occupancy, and a low loan to value will go a long way to convince their credit officer or loan committee to approve it.
And some good news! The credit union borrower was able to get a 2-week extension from the seller and applied with us. We went right to our credit manager and disclosed the DUI. Our loan closed in 44 days.
About the Author
Terry Painter is a member of The Forbes Real Estate Council and is a contributing writer for Forbes Online Magazine. Terry is the founder of Apartment Loan Store and Business Loan Store, a mortgage banking firm specializing in commercial lending in all 50 states since 1997. He has been a top producer for: Lasalle Bank and Lehman Brothers. He is known for his exceptional investment consultations and stratagems. For 18 years he has spoken nationally to commercial real estate investor groups and real estate professionals about commercial real estate investing and lending. For over 20 years, Terry has built strong correspondent relationships representing Fannie Mae, Freddie Mac, FHA/HUD, Life Companies, Wall Street conduits, Hedge Funds, Regional, and National Banks.
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