Ever wonder why a lender turned your deal down when you thought it was great? Your borrower had money in the bank, made a great salary and the property was beautiful with solid cash-flow, but no sooner had you hit “send” on your submission, than your lender was already passing. Why, you ask? By understanding how lenders are looking at transactions in this market and what underwriting guidelines they employ, you will improve your chances of getting deals closed.
Lenders Are Still Cautious
Whether it’s Vinnie on the corner running numbers, or JPMorgan, lenders are still shaken up about the faulty loan decisions they made during the lending craze. Regulators, shareholders, investors, the media and people in general have a watchful eye on Wall Street and real estate lenders right now, just waiting for them to make another stupid move. At the same time, foreclosures and struggling businesses persist everywhere, making the need for lenders with much-needed capital even more acute. Is it any wonder lenders find themselves in uncomfortably precarious territory (and in many cases deservedly so) when it comes to making new loans? They have to be sure they make the “right” loans. And, these days, the only loans they can make are on those properties that won’t end up on their liquidation block. When you pick up a deal, the first thing you should ask yourself is, “Is this a property the lender will end up owning?” If the answer is yes, move on.
Stick to the Facts
When it comes to a lender’s decision on a transaction, your opinion means very little. Actually, who are we kidding? It means nothing. So why do you keep giving it? Lenders have their underwriting guidelines for a reason. In fact, don’t think of them as guidelines, think of them as the Great Wall of China: You’re not getting around them. It doesn’t matter how well you pitch the deal to the lender, how much you like the deal, or how many exceptions you think the lender should make. The loan decision has to suit the lender’s purposes. Even if a lender says its underwriting is “flexible,” you need to understand that flexibility is in comparison to other lenders, yet still within specific underwriting parameters.
Mirror, Mirror on the Wall…
Is your deal the fairest of them all? Lenders aren’t letting any ugly old deal just slip past the velvet rope these days. Below are the initial techniques they are employing to ensure they don’t loan-to-own.
1) Find reasons not to make a loan on the transaction. Aka, cherry pick. It’s the rule of supply and demand: Too many loans need money, and there isn’t a ton of money to go around. So, lenders are looking for flaws in packages, unorganized or confusing submissions, incomplete applications, inadequate ratios, credit issues, value concerns, deferred maintenance, unappealing locations, and almost anything they can reasonably justify, to not do your deal.
2) Determine the most conservative offer the borrower will take. (If you’ve made it this far you’ve won half the battle.) Why make a loan at 70% LTV, if the borrower will take 65% and the lender’s risk exposure is decreased? This is the one aspect of the transaction where you do have some power, so follow the first rule of business and start high! If your client has told you she can take 65% LTV but would really like 70% LTV, ask for 75% and you may just win out.
3) Get the borrower to accept the offer before the heavy lifting. Most lenders aren’t fully underwriting files until they know that the borrower will be on board with their terms. Once they’ve vetted the transaction from the initial information submitted, they’ll want the borrower to sign their term sheet, before rolling up their sleeves. Just because you received an LOI doesn’t mean the lender can or will fund it.
4) Search for risk. The borrower has put pen to paper, all lender-required documents have been collected, and the lender goes through each item with a fine-tooth comb and that “loan-to-own” mindset we covered earlier. This is when a transaction that passed with flying colors when you underwrote could get rejected once lender metrics are applied. Make sure you clearer understand the lender’s underwriting guidelines and requirements before having your borrower move forward with the lender’s LOI and pay a deposit.