4 Things to Expect When Applying for Commercial Mortgages
08 15 2017
For most people, the excitement level of applying for a commercial mortgage ranks just above sitting in rush hour traffic. Although purchasing a new investment property or lowering your monthly payments can be great reasons to seek commercial property financing - the loan process can be a chore.
Whether you’re a commercial real estate investor looking to purchase a new investment property, or you’re a financial advisor assisting your clients as they navigate through a range of real estate opportunities, it’s beneficial to know what to expect during the commercial loan process. Once you’ve prepared and understand how the commercial loan application process works, applying for this type of commercial real estate financing can be a simple and smooth experience.
Here are the top 4 things a borrower should expect when applying for a commercial mortgage:
1. Letter of Interest Terms and Final Commitment Terms May Differ
When a commercial mortgage borrower receives a Letter of Interest (LOI) from a lender, the borrower may view it as a lender's commitment to lend. This is not the case. An LOI is simply an outline of "potential" terms, which can change in the weeks following. The lender is not intentionally trying to pull a bait-and-switch.
When the LOI is first issued, underwriting only has a small amount of information on the commercial property and borrower(s) to review. They issue out a Letter of Interest with the presumption that a full loan application evaluation will disclose a more complete picture of the property and owner's financial background.
If an adjustment to the LOI is necessary, it will generally only include adjustments to the final loan terms required fit the institutional guidelines of its lending programs – or to match its findings in the due diligence period. Nevertheless, these changes can affect the borrower positively or negatively and may come as a surprise, so it’s always wise to remain in open communication with the lender throughout the application process.
2. Commercial Mortgages May Have Additional CC&Rs
Paying the commercial mortgage principal, interest, taxes and insurance on time are not the borrower’s only responsibilities. Most commercial lenders also have other conditions, covenants, and requirements (CC&Rs) for their borrowers.
Some commercial lenders require borrowers to provide quarterly or annual operating statements and a copy of their tax filings for the duration of the loan to ensure the property/borrower are maintaining the lender’s financial criteria. Borrowers may be required to maintain the property’s operating account with the bank or have a minimum deposit in place as a method of offsetting some of the bank’s lending risks while building a stronger relationship with the borrower. Moreover, depending on the property type and location, a lender may also require certain certifications and tests be done regularly to insure the property is in good standing.
Each lender has its own specific CC&Rs – some less stringent than others – but failure to adhere to them could be grounds for a lender to consider the loan in default. A borrower would do well to consider a lender's added requirements as closely as the loan amount and interest rate described in the mortgage agreement.
3. Commercial Loans Can Take Longer to Process
Residential loans can be completed from loan application to loan closing in around three to six weeks, but commercial mortgages often average six to twelve weeks. Both processes can be impacted by how long a borrower takes to complete the loan application package, but unlike residential properties, commercial properties are characterized by many more variables that make the property a viable or non-viable loan collateral.
For example, the receipt of third party reports and underwriting review also extend the timeline. Third party reports such as appraisals, environmental reports, civil engineer opinions, and permit reviews can take three to eight weeks to complete. Once the entire loan package is completed, an underwriter may take one to three weeks to review the file and possibly send it through legal review and/or committee for approval.
4. The Lender Doesn’t Control Third-Party Reports
As a way of signifying a commitment to starting the loan process, borrowers will often give lenders good-faith deposits which, in turn, will mostly be used to pay third party companies to complete specific reports or tasks. The lender contracts with these third-party sources to have their investigations and reports completed within specific time frames.
However, what those reports reveal, the opinions provided, and how fast they are produced (within their allotted time frames) are not in the lender's control. This is not to say that third party reports are incontestable or infallible. If a borrower believes there are errors or changes that should be made, a borrower can challenge a third-party report and present their reasoning to the lender.
Commercial Loans: The Application and Beyond
Of course, there are many similarities in the commercial mortgage application process to other loan application processes you may be more familiar with. You should always do your due diligence to understand the intricacies of the loan and ensure whatever real estate opportunities you may be pursuing is truly a good choice for your financial goals and situation. Now that you know what you can expect from the commercial mortgage application process, it’ll feel a little bit less like rush hour traffic and more like a sunset cruise.
This article was originally posted on May 17, 2016 and updated on August 15, 2017.
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