Property Manager · New York City, NY · Member since 2013 · 34 posts · 10 votes
What do banks look for? Are there any loan officers/underwriters here that can chime in?
Here is what I know. I believe that loan officers make about 1% on loan amount. So, they are always looking for solid investors who will make a lot of future loans. If they do $5 MM in loans every year, they can make an additional $50k to supplement their salary which is huge for them.
But, at the end of the day, the underwriter makes the final decision on loan approval. So, what are these guys looking for? I am probably way off about this but it seems that they look for particular characteristics. It seems that commercial loans (which include apt buildings) comprise about 3-5% of each branch's portfolio of loans. So, they don't want to do too much. Then, they want different types of commercial loans so it's diversified - some residential, some office, etc. Also, they are looking for loans that are as conservative as possible - properties with very stable cash flows (solid tenants with long-term leases).
So, how much weight really goes into looking at LTV, debt income ratio, etc.? Or are these parameters simply the initial things they look at and in order to approve the loan? Because it seems that they really emphasize the credit worthiness of a multiple-tenant base.
I guess I have a lot of questions. The reason for these questions is when I make my loan packages, I just want to know exactly what I should be emphasizing and de-emphasizing.
Residential Real Estate Broker · Bremerton, WA · Member since 2013 · 494 posts · 142 votes
13y
Hi Roger - I see no one has replied and this is a great question.
I am not an underwriter, and have completed this process only a handful of times, but will contribute what I know (many others will chime in here).
What the bank or underwriter is looking for depends on whether it's a commercial or residential loan (1-4 door loan).
Looking for:
1. Income - consistent, stable personal income stream - this is true whether you are w-2 employed or self-employed. I'm self-employed. Self-employed ppl need to report all income on taxes (underwriter asks for two yrs taxes minimum), deposit into bank (they want to see bank statements). Before closing, underwriter may ask for details on other deposits/withdrawals. Keep great records.
2. Low Debt - don't take on debt. Get rid of any you have that you can (is reasonable). You can have a house payment. I have rentals, but they are seasoned now and cash flow - so they are therefore "erased" and are now considered income by my lender. Only buy CF properties. Otherwise, it adds to your debt.
3. DSCR (Debt Service Coverage Ratio) - Commercial lenders look at this number. This is important when coming to a lender with a property. Make this number high. Here is a link on calculating DSCR [url]http://www.biggerpockets.com/renewsblog/2008/03/10/apartment-building-investments-debt-service-coverage-ratio/ Learn to calculate this number.
4. Income statement - Go in with your personal Income Statement and Balance sheet ready when meeting with a commercial lender. This document(s) will show the lender what you have - what you can do to support the loan.
5. A Plan - Write a short, clear, plan for the property. I keep my plans 1-2 pages. Bankers don't want ot look through a bunch of pages from what 've seen. If the plan includes rehab, include names of who will work on the property. My lenders like to see that I will hire others to work on property. They do not like "do it yourself" types. Budget to hire out. I am also in a smaller community, so the bankers know who the good contractors are (they've seen failed jobs and successful jobs) - I've had bankers recommend different contractors when looking at my plans before. Take the help. Approach this as a business meeting and the banker is a business partner. They are on your side, there to help you. Many bankers are a wealth of information.
I've also been honest with bankers and told them their loan terms won't work with my plan - if I went forward with their loan, the numbers simply won't work (or the numbers are to risky for me). b/c a banks numbers didn't work for me, several bankers have referred me to another bank who has been able to provide what I needed. Honesty on both sides of the fence. I see it as protecting the banks investment as well as mine. The bank I work with is a partner - a relationship I need to nurture and protect. This holds true for any partner I work with. The financing is essential and needs to allow for the margins of profit to be there - otherwise, "no deal" and you start looking for other financing or another property.
I'm sure I've missed something here and others will fill in and elaborate. I still have a ton to learn and I know this. OTOH, the few deals I've done (combined with reading and asking questions like you are doing) have taught me a god amt. so far. Hopefully, this helps.
Property Manager · New York City, NY · Member since 2013 · 34 posts · 10 votes
13y
I agree with some of your points but slightly disagree with others.
1. It's great that you've had such an honest, open relationship but my experience has been far from that. The banks have their own objectives which is have a loan portfolio that looks great on paper. In my experience, the relationship hasn't been all rosy. On one hand, we have the loan officer who will do anything to get the deal done. So, they might string you along because it doesn't hurt them to waste your time. And, then we have the underwriter who is presented with all these deals and only picks the most conservative handful. It's hard to get a consistent answer from him/her. One day they want this, another day they want that.
2. I agree that you should be honest. Don't hide anything that will come out later. It makes the loan officer look bad in front of the underwriter. For example, if there is a huge oil tank problem that comes out later that you haven't mentioned, it makes you look shady and then they think, what else is he hiding?
3. At the same time, I wouldn't mention details that would make the loan more complicated. Unless it's a core part of the deal, I wouldn't even bring up rehab details because then the underwriter is going to worry if the rehab is going to jeapordize the current cash flow. Make everything simple. At the end of the day, the underwriter is looking for a property that has long-term, stable cash flows. Keep things simple.
4. I agree that those ratios are what the underwriter is looking for. Those are the first things that they ask for. But, I am assuming that the readers here are more experienced than that. So, I wanted to know a more detailed analysis of the loan process. I guess I wanted to know exactly what/why the underwriter is looking for. What is the ultimate goal of the underwriter? How are the loans syndicated? What is the ratio of commercial/residential should a loan portfolio have? etc....