Commercial Mortgage Broker

Getting a commercial mortgage today takes a lot more than just applying for the mortgage. Lenders want to make sure that the borrowers and the project are rock solid.  Here are five tips from the Scotsman Guide to help make sure you have the best chance of approval on your commercial mortgage.

Working with an experienced commercial mortgage broker that understand what lenders require is of utmost importance in today’s mortgage market.

1. Net worth

To start, lenders must know the borrower’s net worth. Simply subtracting the liabilities from the assets doesn’t necessarily translate into a trustworthy estimate, however. Lenders will question asset values when borrowers don’t provide supporting documentation to back up the market values assigned to each one. Conversely, borrowers rarely overstate their liabilities but instead tend to understate them. An overstatement of assets and an understatement of liabilities can result in an erroneous net worth.

A broker usually can find borrowers’ net worth on their personal financial statements. A personal financial statement includes a balance sheet and an income statement with supporting schedules that provide details for the values stated on the primary balance sheet. Borrowers rarely provide adequate details for a lender to discern whether the value of the assets is realistic or if the equity in the assets is market equity, actual cash equity or both.

Lenders want to make quick decisions. Omitting critical financial information is a sure way to lose a lender’s interest. To keep a lender interested, prequalify borrowers by scrutinizing their personal financial statements. Call them and get details, ask questions and make sure the schedules are self-explanatory. As a general rule, a borrower’s net worth must be equal to or greater than the requested loan amount.

2. Liquidity

The term liquidity is often misunderstood and is many borrowers’ primary shortcoming, thus the primary reason that lenders decline many loan requests. Generally speaking, liquidity is defined as any asset that can be liquidated or converted into cash, usually within three days. Liquid assets include cash, stocks and bonds, or any marketable security.

Brokers also should think in terms of pre-funding and post-funding liquidity. Pre-funding liquidity refers to all the cash available for the down-payment, operating capital and capital improvements or replacements. The only way to determine if the pre-funding liquidity is adequate is to prepare a “Sources and Uses of Funds” schedule.

Post-funding liquidity is important because lenders like to see a surplus of cash after closing so borrowers have adequate reserves for items such as capital replacements, immediate repairs, renovations, working capital and deductibles for insurance claims.

In general, the degree of liquidity must equal at least 10 percent of the loan amount or about 12 months’ worth of debt service.

3. Free cash flow

A personal financial statement includes a balance sheet and income statement or statement of cash flow. The statement of cash flow is rarely completed accurately, if completed at all. Borrowers may have many sources of income, such as a W-2 salary, business investments and real estate investments. All of these must be taken into account when determining their cash flow.

Free cash flow is the cash available after all operational expenses, mortgage and debt payments and federal income taxes. It is the amount left for borrowers to use however they like. Calculating borrowers’ free cash flow helps determine how much they have available to contribute to any particular mortgage payment in the event of a disruption in cash flow at the property level. If borrowers do not have enough free cash flow, then they more likely will fall behind on mortgage payments or default if the property experiences a disruption in cash flow.

One of lenders’ biggest challenges is getting their arms around borrowers’ personal cash flow. Brokers can add tremendous value by helping their clients construct their personal cash-flow statement. This may seem like tedious, time-consuming work, but the alternative is a nebulous personal cash-flow statement that raises more questions than it answers.

If you can’t fully grasp or interpret a borrower’s free cash flow, then the lender likely can’t either — which means no loan.

4. Credit score and history

The fourth component of creditworthy borrowers is their credit. A borrower’s credit score may seem self-explanatory, but do not make any presumptions in this area. If possible, review all their credit reports from the three primary credit-reporting agencies and identify any derogatory credit marks, such as late payments, collections, high balances, too many credit cards, unsecured debts, too many auto loans, etc., as well as public records like bankruptcies, tax liens or summary judgments.

Any credit issues or potential blemishes need written explanations and most likely should be resolved before the lender sees these reports. If lenders discover any derogatory marks on a credit report, it is sure to spook them. A broker can pre-empt the lender by reviewing the credit reports first, thus providing explanations as needed and eliminating any suspicion. Even if the issue can be resolved or if there is a good explanation for the derogatory mark, you never want the lender to get a negative first impression.

5. Ownership experience

Another area that borrowers often fail to demonstrate adequately is their previous ownership experience. This may not be monetary in nature like a balance sheet, but it does reflect their ability to manage financial affairs. Not only must borrowers show a high net worth, adequate liquidity and strong credit scores, but they also must convince the lender that they are capable of making sound business decisions and managing money and personnel.

Borrowers usually can demonstrate ownership experience with a professional résumé, but that document often pertains only to education and past employers. Lenders really are looking for borrowers’ history and experience in owning and operating commercial real estate, such as apartments, retail centers and office buildings. Managing commercial properties for others, whether as an employee or independently, is a good start, but some lenders don’t equate that type of experience with actual ownership.

Regardless of the situation, a broker can reduce the risk of losing the lender’s interest by helping borrowers prepare a persuasive narrative and track record of their relevant commercial real estate experience. Again, this can be time-consuming and tedious work, but it’s worth it if you are successful in getting the loan approved

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