Beware of these top unfair lending practices for business purpose loans

[Erik Estrada]

I have been working on a lot of retail fall out deals lately and wanted to make any new investor aware of the most common tactics I see a lot in the DSCR/Hard Money space.

1. Failing to accurately disclose fees and rate locks. 

I had one client tell me that a well-known direct lender did not provide her any preliminary settlement statement/CD and mentioned that they could not lock in her interest rate/terms until final approval. While this is something somewhat common in the commercial space 5+ Unit MFH and others, there are many residential DSCR lenders that have adopted a disclosure practice and can lock your rate for 30-45 days. I would suggest working with a lender that can be very transparent and honest with you.

2. Bait and Switch 

This can be prevented by doing some background research on the mortgage company/ loan officer. Look for licensing, reviews, customer complaints. It is highly unlikely for someone to take time out of their day to leave a bad review, especially if a lender has been honest and transparent throughout the entire process. I get it, some deals can fall out due to external reasons, but if you keep seeing bad reviews be very cautious. 

3. Sticking Gum and seeing if it will stick 

This one is self-explanatory. If you are constantly getting negative feedback from your deal, be very careful if you get a lender that is overly confident in your deal. While there are instances where you can close on a very "hairy" deal with a lender that CAN perform, the tone will be very different. Please check for reviews and see if you can get written feedback from an Underwriter. 

[James Stout]

Erik – great breakdown. I see the same themes on my end. The bait-and-switch in particular has cost more than a few investors time and money. I always remind borrowers that in business-purpose lending, disclosure rules aren’t the same as consumer mortgages — which makes transparency and written clarity with your lender that much more important.

Luke, your point is well taken. The appraisal and 1007 analysis do matter, but a borrower should still know exactly how fees and points are structured up front. Even if the final rate can’t be locked on day one, there’s no reason for surprises at closing.