Many borrowers have this belief that, “Lenders and Banks don’t like me because there are too may red tapes involve when it comes to financing my property.” That could not be further from the truth. In fact, lenders and banks love to work with borrowers. The expectation for a lender to fund an asset is always high because financing your property means it is a win for the bank, whether the loan is kept on their balance sheet or securitized. In fact, lenders are always salivating about the “right borrower”. When this happens, it is a marriage made in heaven. There is an article I wrote a few months ago about “default” being the kryptonite of lending and how borrowers should be aware – find it in the post categories because it is a great read. This short piece is not a lengthy report proposing how a borrower should work with lender and a bank to get funded, it is simply a couple of frequently ask questions that typically come up during my conversation at events by potential borrowers.
Reason #1 – Your finances pose a threat to the lending institution.
Miss ZeZe has a credit FICO, Fair Isaac Corporation, score of 500 and neglects to seek credit counseling advice to repair her credit profile. During the underwriting process, credit and liquidity are two critical components that a lender will heavily rely on to make funding decision. Some banks will never fund a borrower with a FICO of 650. On the other hand, many alternative lenders and mortgage brokers in the capital market space will be able to work with her. What about debt to income ratio? For instance, if Miss ZeZe is looking to refinance, and current monthly debt service for her 5-units’ apartment is $10,500. The other debts are $5,000 in credit cards, an auto loan $650 monthly, and other miscellaneous expenses $1,200 monthly.
The monthly debt payment is: $10,500 + $5,000 + $550 + $1,200 = $17,250. If the borrower’s monthly gross income is $20,000 then the debt-to-income ratio is 86.25%. This is a high debt to income ratio that many traditional and alternative lenders will not entertain. A solution should be to: (i) decrease credit cards to lower than 30% of credit limit; (ii) refinance and downgrade to an auto less than $500 monthly; (iii) reduce miscellaneous debts; and (iv) increase gross income. Unlike residential real estate where a general rule of thumb is 43% for debt-to-ratio to satisfy lenders and qualify for a mortgage, commercial real estate lending process is entirely different when funding borrowers.
Reason # 2 – There are unpaid liens on the property and judgement on the property
It is not in the best interest of a sponsor seeking financing and building relationship with a bank and lender to be nonchalant about issues such as: unpayable tax liens on the property, legal judgements, and a myriad of other public record issues. Typically, a voluntary lien, mortgage lien can be solved quickly with the loan issuer if financial difficulty suddenly arises while paying debt service. Banks love dealing with sponsors who are proactive and demonstrate and affinity to “always” pay their monthly loan payments on time or seek solutions to remain constant on payments even during time of financial disturbance. Involuntary liens such as: property taxes, mechanic liens, materialmen, etc., will not portend well with a lender during preliminary underwriting.
In fact, as soon as a lender find out these liens exist, a borrower’s loan may be doomed – that is until these issues have been resolved and verified. The worst nightmare for a sponsor is to hide a judgement lien, a court decree from a lawsuit which monies tend to be awarded for damages, from a bank and a lender. Some borrowers may have hidden these issues if they are not public record yet after while going through the loan funding process. Unfortunately, the bank will eventually discover a judgement lien and other issues that are undisclosed – Denied! Remember a bank’s primary business is to manage a multitude of risks, funding come in second, and borrowers must understand that a bank’s due diligence process will not fully be completed until his or her loan is closed.
Reason # 3 – Inability to resolve finances, credit and liens issues
Sponsors who are very reputable and have long standing relationship with a bank or a lender may believe they are immune to the above-mentioned reasons. A bank does not care if you have been in a relationship with it for 10 years. Brusquely you want to refinance the 50 units’ apartment complex for $6.5M, but have fallen: (i) into two bad lawsuits with the retail tenants on the ground floor; (ii) have mechanic liens issued by contractors due to unfinished property renovation; and (ii) a financial statement that is sup-par. Yes, the same bank refinanced your property 5 years ago, and truly want to grow a lending relationship.
However, the apparent risks were miniscule 5 years ago, and the lender believed he could managed those risks to prevent default in the long term. Are there other alternative lenders, private lenders that may take on more risks and refinance the asset? Absolutely! Rates will be extremely expensive (9% to 30%), terms will not be as superb, the penalties will more severe, and there will be many strict covenants in the loan document before funding. The borrower may not be in the utmost position to take on such a responsibility as of now. The best solution in this scenario is to resolve her finances, credit profile, all liens, and present a better financing story in front of lenders and the bank.
By: Ibsen Alexandre
Ibsen Alexandre offers his opinions about real estate finance, business, and investment at www.Refivest.Com and other real estate publications. He can be reached at email@example.com
The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation to lend.