Commercial Loan Terms

19 Replies

Hi! I’m looking to refinance cash out of my three unit rental property.

I owe 140k and it’s appraised for 280k, so I’m looking to take out around 60k. Positive cash flow of around $1200 per month before refi.

My question is about the terms and “commercial fee agreement”.

1. The commercial lender took preliminary info about my credit score, property, cash flow, value, etc. He said everything looks good and I would likely be approved for a 3.75-4.25 rate with 10-20 year rate lock and 25-30 year amortization. This sounds great! Does it sound too good to be true? Which leads me to the next question:

2. The lender is requiring a $5000 "commercial fee agreement" before moving forward. It's basically a fee for them doing the underwriting. They get most of the fee ($3500) even if they don't provide a LOI or the LOI is not within the terms we discussed (above). So my second question is, is this fee normal? With no guarantee of a loan? I just pay them to tell me yes or no?

This lender was referred by my residential mortgage broker (who is also a friend). He says he's never used them before, but thinks they are legitimate.

I also paid a fee with my previous commercial refi, I just don’t remember it being non refundable even if they can’t provide a loan.

Just looking for feedback on both questions above.

Thanks!

Hi Kelly - the terms look pretty good and standard. 

I'm wrapping up a development where I'll have a 15 year amortization with a 4.25% fixed rate paying a point to the bank. That's pretty standard. 

I'd be very careful about fronting money which looks to be an application fee. You should only pay the fee if the loan closes. You might be able to structure it where you only pay the fee if you back out vs. them not approving you. It does NOT cost that much money to underwrite a deal.

Talk to a local bank and credit union and get a quote from them.

@Kelly McMillan I agree the terms look good, but that fee is ridiculous.  

I have had clients pay for appraisals up front, and maybe a $500 underwriting fee paid at execution of lender commitment, but $5000, nonrefundable, up front fee on a loan of this size is unheard of

Originally posted by @Kelly McMillan :

@Andrew Beauchemin Wow! Unheard of! Thank you for the context. That’s what I was looking for. It seemed at minimum “unfair”. I’m glad to know I’m not crazy.

Charging a fee up front is not common at all. Usually it’s a scam. Fees will be paid out of closing and for a loan your size should not be more than a few hundred dollars. Make sure to talk to several local banks and get some quotes. Some may not charge any fees at all.

I am in the middle of a commercial refi; $320k @4.5% fixed, 10yr term/15yr amort. There were no upfront costs until a signed OTL was returned, and then a .25% "commitment fee and costs for appraisals/environmental/other expenses incurred (and the lender kicks back 1% of all those closing costs at consummation).

@Greg Dickerson Thanks Greg. That’s what I was thinking too. I just couldn’t believe I would be getting scammed! But it still didn’t sound right, and I just don’t have enough experience yet to know for sure. Thank you for your input. Maybe it saved me $5000k!

I have been doing this for 16 years in the commercial space. I can tell you this. I am the transaction buyers broker but have plenty of capital markets mortgage broker guys and gals.

They bust their butt to get the best rates and GET PAID when the loan closes and not a penny before. Now there are lender deposits for reports such as (environmental phase one, ALTA level one survey, site inspection, appraisal , etc.) that you send money into the lender directly for a deposit and unused portion you tell them if you want unused portion back directly or used for payable items on the HUD 1. You need to know lender costs and fees upfront. The great lenders are very transparent. Then there are ones with tons of junk fees to try and eat up every cent of your deposit even if reports do not make up the whole amount. There can be lender legal fees paid to their attorneys for the preparation of the loan docs and I have seen anywhere from 3,000 to 10,000 but my deals are in the millions or larger. Sometimes a CMBS loan I have seen tens of thousands in attorney fees.

If a point taker or mortgage broker gets most of their money upfront or a good portion of it then they are not incentivized to vet the lenders much if at all. If they only get paid at closing when it funds you better believe they vet the lenders and make sure they do not re-trade terms mid-deal or plan games. The mortgage broker eats when they perform just like I eat when a property closes.  

Some lender have application fees, lock fees, etc. The key is to know if they are a real lender who closes on what they quote often or do they take a bunch of fees and find ways to turn down loans and only fund the occasional one to prove they are a lender to the SEC.   

 

@Kelly McMillan are you working with a commercial bank? It doesn’t add up for me.

1) The terms are FAR to aggressive for an investment property cash out refinance. I can't imagine a scenario that they would offer you terms like this before underwriting. 10 year fixed is rare in itself for this asset type. Let alone 20, at 3.75%. Are any other lenders or investors seeing 20 year fixed rates below 4% doing a commercial loan? If so, the Bank is not going to be around very long

2) For a loan of this size, an upfront fee of that size is a big red flag. If anything you should be getting charged a a quarter point to full point origination fee due at closing. *Yes, for large deals an upfront fee does sometimes occur upon acceptance of the commitment letter; but it would be refunded as a credit towards the borrower at closing. The only reason the bank would keep the fee is if the borrower willfully decided to not go through with the loan. With that said, for large loans in the million + range, the upfront fee would be not much more than what they asked of you. Again, makes no sense to me.

It doesn’t have any traits of a typical commercial loan.

@Kelly McMillan ...I agree completely with @Matty Foley ...being a broker and hands in the commercial space, that's uber aggressive and highly unlikely terms given your asset.  (No offense to your asset).  And given the fee, that doesn't sound right at all especially provided the loan size.  I would never do that.  Many lenders even in the stated income space don't charge any upfront fees except for appraisal (which you pay directly), and everything else is done at closing.  That sounds fishy.  If you want to disclose the company, that might give you more heads up, but $5k fee with some non-refundable does NOT sound right at all.

@Jared Rine Thanks Jared. That all makes sense to me. I thought the terms were a little "too good to be true" as well, although I was optimistic! I definitely see what you are saying, if they are paid up front what incentive do they really have to get the job done? He tried to talk through it ($5000k "deposit") so well but, I just wasn't convinced, something seemed off. Maybe the deposit after the LOI? But I even called my current bank after reading all the posts on here and they said their fee would only be $600 (minus third party fees of course). That's $600 fee versus a $5000 non guaranteed fee! I'm so glad I posted on here to get this feedback. Thanks again

@Matty Foley Thank you so much for your thorough feedback. I really appreciate everyone’s perspective on this. I was really nervous to commit. but was trying to convince myself it would be okay. After receiving all the feedback (including yours), I have decided to go a different route. Thanks again

Originally posted by @Kelly McMillan :

Hi! I’m looking to refinance cash out of my three unit rental property.

I owe 140k and it’s appraised for 280k, so I’m looking to take out around 60k. Positive cash flow of around $1200 per month before refi.

My question is about the terms and “commercial fee agreement”.

1. The commercial lender took preliminary info about my credit score, property, cash flow, value, etc. He said everything looks good and I would likely be approved for a 3.75-4.25 rate with 10-20 year rate lock and 25-30 year amortization. This sounds great! Does it sound too good to be true? Which leads me to the next question:

2. The lender is requiring a $5000 "commercial fee agreement" before moving forward. It's basically a fee for them doing the underwriting. They get most of the fee ($3500) even if they don't provide a LOI or the LOI is not within the terms we discussed (above). So my second question is, is this fee normal? With no guarantee of a loan? I just pay them to tell me yes or no?

This lender was referred by my residential mortgage broker (who is also a friend). He says he’s never used them before, but thinks they are legitimate.

I also paid a fee with my previous commercial refi, I just don’t remember it being non refundable even if they can’t provide a loan.

Just looking for feedback on both questions above.

Thanks!

Why aren't you looking into doing a Fannie or Freddie loan?   It will be cheaper, the rates are similar and the amortization is based on 30 years and fixed for 30 years.  

Anytime a lender asks for money up front especially that much a big RED FLAG should go up.  Don't do that deal it's not right! 

Originally posted by @Kelly McMillan :

@Shaun Weekes thanks Shaun! One of the units is commercial, and not owner occupied. I don’t believe I’m eligible for a Fannie.

 You are correct with that statement.  If you lived in one unit it would be.