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What to Expect When Applying for Commercial Mortgages | Woodbridge

05 17 2016

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For most people, the excitement level of applying for a commercial mortgage ranks just above sitting in rush hour traffic. Although the purchase of 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.

When applying for a commercial mortgage, it is beneficial to know what to expect during the commercial loan process. Understanding the process will help you understand what is normal when applying for a loan. With preparation and a bit of luck, applying for a commercial mortgage can be a simple and smooth experience.

Here are the top 4 things a borrower should expect when applying for a commercial mortgage.

(1) The Letter of Interest terms may not be the same as the final commitment terms

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.

When an 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. A lender is not intentionally trying to do a bait-and-switch with the borrower. If an adjustment to the LOI is necessary, the lender is simply adjusting its final loan terms to fit the institutional guidelines of its lending programs and matching its findings in the due diligence period. Nevertheless, a borrower may be upset about any loan term changes, which can affect the borrower positively or negatively. In this situation, communicating with the lender to discuss options is recommended.

(2) Commercial Mortgages can have additional conditions, covenants and requirements (CC&Rs)

Paying the commercial mortgage principal, interest, taxes and insurance on time are not the only concerns for which a borrower is responsible. Most commercial lenders ask its borrowers to provide quarterly or annual operating statements and a copy of their tax filings for the duration of the loan. This is so a lender can make sure the property/borrower is maintaining the lender's financial criteria and that the borrower is making consistent filings.

Some lenders may require a borrower to maintain the property's operating account with them and/or have a minimum deposit relationship in place. By having the borrower keep a specific dollar amount in their bank, a lender is able to offset some of its lending risks while also 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.

Failure to adhere to a lender's CC&Rs could be grounds for a lender to consider the loan in default. Each lender has its own specific CC&Rs - some less stringent than others. A borrower would do well to consider a lender's added requirements as closely as the loan amount and interest rate they are offered.

(3) Commercial loans generally take longer to process than residential loans

Residential loans can be completed from loan application to loan closing in around three to six weeks. Commercial mortgages can average six to twelve weeks.

Both processes are largely impacted by how long a borrower takes to complete the loan application package itself.

However, for commercial loans, the receipt of third party reports and underwriting review also extend the loan process time frame. Third party reports such as Appraisals, Environmental Reports (Phase I / Phase II), civil engineer opinions, and permit reviews can take three to eight weeks to complete. Then, once the entire loan package is completed, an underwriter could take one to three weeks to review the file and possibly send it through legal review and/or committee for approval. Unlike residential properties, commercial properties are characterized by many more variables that make the property a viable or non-viable loan collateral.

(4) Third party reports are not controlled by the Lender

Lenders receive good-faith deposits from the borrower to signify a commitment to start the loan process. Most of the monies are used by the lender to pay third party companies to complete specific reports or tasks. Monies that are not used are often credited back to the borrower at loan closing.

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.

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