Articals

15 mistakes that most borrowers make while going through a commercial or business loan transaction

Title: 15 mistakes that most borrowers make while going through a commercial or business loan transaction
Author: Harlen Freidman - President, Lightning Commercial Funding, Inc.
Added: 10-25-2009

We have seen a drastic pickup in the number of loan closings and the loans that are in our pipeline. By being aware of these “faux pas” we can hopefully help you avoid these mistakes and have smoother closings.
Borrowers tend to:
1) Order Appraisals on their own. Do not Order them let the lender order them after not before preliminary loan approval.
2) Don not Pre‐qualify 1031s extensively before legally identifying the properties. Let a Bank or Broker extensively pre‐qualify your selection of property before legally identifying the property.
3) Under estimate closing costs and required down payment. Expect at least a 25% increase in closing costs due to taxes, insurance etc being collected to start the new loan term.
4) Relying on Rate Sheets and Preliminary Spreads and LTVs to determine down payments. Get current not projected cash flow models and all operating expenses before calculating down payments or expected Loan to Value; there is a direct correlation between the two.
5)Underestimate the time for approval and then closing. Enter into Purchase contracts with much longer financing removal contingency time, at the least would be 45 days.
6)Trying to secure more than one loan at a time before the closing occurs on the first loan. Don't Apply for ANY additional credit while in loan underwriting through to not only funding but closing of the loan request.
7)On a refinance of a property not being aware of how much the pre‐payment is going to run the borrower. Get an actual payoff from the existing lender, do not rely on what you are reading in your own "docs", there will be ancillary fees.
8)Under estimating the time for the ancillary services such as Insurance, Title, Escrow, etc. to get their needed documentation & policies underwritten and put in place. Line up all your additional services before loan underwriting gives final approval, and then all you have to do is authorize the payment of the services once loan approval has occurred.
9)Relying on a Financial Spread by the BDO, or LOI as the final terms, conditions and approval. Do not rely on any preliminary BDO terms and conditions; only rely on the loan approval docs terms and conditions.
10)Relying on the credit that you pulled for yourself on free credit internet sites as your real score that the lender is going to get when they pull the credit. Just Do not Do It!, Lenders credit reports will always vary from the credit reports that we pull ourselves.
11)Assuming that just because a property cash flows, and a borrower has good credit that the lender is going to approve the out‐of‐state borrower. You must be aware that not all deals close, especially with the out‐of state first time borrower.
12)Underestimating the costs and expenses that the Lender is going to deduct from the gross rental income and the resulting net income, such as TILC (Tenant Improvements Leasing Costs), Management, Insurance and taxes. Wait till you get the underwriters spread of the existing cash flow before determining if you are going to be able to buy the property and have a good ROI (Return on Investment).
13)Under estimating the amount of documentation that is required to get a package together and placed into underwriting. Just be aware that the time from full loan approval to doc preparation and signing to the actual money being transferred to close the escrow is expanding every day.
14)Under valuing the importance of cash flow projections for the purchase of a business or an investment property. Understand that CAP Rates have a direct effect on the cash flow of the project, And CAP rates will be decreased as the lender adds more and more expenses to the bottom line, thus affecting your bottom line.
15)Not valuing the importance of the 4506 seller tax validation. The importance of the 4506 cannot be underestimated, if the sellers tax returns don't reflect what they were represented to the lender as the loan will be denied and if you as the borrower have un-explained issues on your 4506 the lender may not close the deal.
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