What are the challenges in loan approval?
There are three distinct but equally significant components to loan approvals for all investor properties. The first component is an analysis of the property, the second is a review of the borrower’s credentials, and the third is an internal lender approval of all third-party reports.
Step One - Property Analysis
In this analysis we are looking at a few separate aspects of the property. In summary, this would entail a review of the rent roll, income and expenses, the property condition, past capital improvements, and finally how the asset competes in the market. While it may seem that the most critical issue is current Net Operating Income, the property condition and market factors could affect the forward financial success or deterioration of that NOI. Providing everything is acceptable, the underwriter now must input these findings into the lender’s own criteria standards and adjust accordingly to derive at the maximum loan amount, best rate and terms, and other conditions for final approval.
Step Two - Borrower Review
Every lender and loan program will have different standards for what constitutes an acceptable borrower. In this review we do look at the entity itself, but the real focus is on the principals of that entity. For over 95% of lenders, a principal is defined as anyone that owns more than 15 to 20% of the entity. In cases where no one owns such a percentage, the underwriter will instead focus on the managing principals of the entity. Whether recourse or non-recourse, the review is the same---credit scores, past credit issues, cash liquidity, global cash flow, and background. There are variations among lenders of what may constitute an acceptable principal since each has their own risk tolerance.
Step Three - Third Party Approvals
The third critical part of the investor loan approval process is a review of title, appraisal, environmental, and if needed, a property condition report. Since these reports are not ordered until after the loan application has been accepted, it will take several weeks or more before such review can occur. When reviewed and accepted, the loan can now move towards final commitment and closing.
Conclusion
The critical point to understand is that investor loans are a process that has many moving parts. Properly navigating these waters to achieve your goals takes time, skill, and knowledge. However, if done right can lead to financial success. At Atlas, we prescreen all loan submissions with diligent upfront underwriting before we recommend any of our clients to proceed with a loan application. We also match up our underwriting to the known specifics of our lenders. This process is just one of our major benefits and has resulted in lenders offering their best pricing for our clients’ loans.
Kevin Meehan is the managing partner of the national commercial mortgage and correspondent loan brokerage firm Atlas Commercial Capital, Inc. which is headquartered in NYC. He has been closing multifamily and commercial property loans for over 35 years and can be reached at 212-332-3457 ext. 101 or by email .
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