Why deals die in underwriting

Question

We have all been there. You've got a great deal. You've got an excellent window to execute based on everything else you have going on. Your loan officer gives you terms that line up so sweet you can't believe you're so lucky. They promise to get you closed fast.

Then come the conditions. Requests for documents you've already sent. Explanations for things that have no bearing on the deal. Suddenly the expected closing date is coming up, and now, all of a sudden, nobody at their office will answer or return your calls. You start to stress, you start to wonder if you need to work on a back up plan when they finally get back to you - and it's either suddenly denied altogether, or the terms have become much less attractive than what was promised.

Some lenders just do business this way. Send out the best terms possible, take every deal, and then figure out what they will actually do after they have you committed. Often, it's not an intentional business plan, but a lack of experience or work ethic. Lending, especially when dealing with private lenders, is very subjective. I've seen deals killed for the most asinine of details. If your loan officer doesn't know their companies guidelines inside and out, studying them on a regular basis, staying on top of changes - then two things are going to happen.

1. You are going to get terms that they will never, ever close at. Instead of taking the time to learn about your deal, and your business model - they show you the best possible scenario even if your deal, or you as a borrower, don't qualify.

2. When underwriting starts to push back, adjust the loan structure, or make decisions outside of guidelines - you have no advocate that can reasonably push back and still get your deal funded.

Take time to find the right capital partner. Just like you would with any other contractor you are dealing with. If you can't, or just don't have the time to filter through all the options out there and find the best fit for you, utilize a broker. However, when interviewing brokers make sure they are going to be discreet with your information and your deals. Many brokers either - A. Essentially work as an independent contractor for one lender, sending the majority of their business there with a couple of back-ups or B. blast your deal info to a list of dozens of private lenders and waits for the best looking term sheet to come back.

Make sure you find someone who is discreet and selective both with their borrowers, and their lenders. Otherwise you open the door to spam, unrealistic terms and added stress.

Michael Manchester · Answer

Private capital is definitely a different animal. Non-QM shops have been working on expanding into the investor capital world, but for some reason seem to struggle with it.

Personally, I think it's because the private investor capital is so unregulated it feels abnormal to the conventional and non-QM folks. Same for investor capital people - we don't really understand the excruciating detail that goes into the underwriting of those loans.

I'd say the biggest factor in private lending that most borrowers don't take into account is how subjective it is. Private lenders in the BPL space are not required to give you a loan or work with you. Your deal can match all their guidelines seemingly to a T - but can still get declined over small and/or seemingly asinine details. So you need a well-versed LO or a broker who actually cares to make sure you have the support you need when underwriting starts to set conditions that don't make any sense (happens all the time).

Of course, to compound the problem, many private lenders have an incredible amount of churn in the LO and front line manager positions. That results in borrowers not having a true advocate for their deals - and slow turn times and changes to structure or declines follow.

@Chad Villacorta - excellent tip to ask what are the last three deals they couldn't close and why. To add to your point - also find out if the lender is actively investing, what their personal buy box tends to look like, and where their staff is located. Private lenders are always way more comfortable when dealing with assets and markets they are already in. It eliminates a lot of risk if someone from the office can drive by the property and see how things are going.

If your private lender isn't actively investing as well - there are more questions to ask. I'll break that down in a different post.

Chad Villacorta · Answer

This resonates. Non-QM has its own set of killers that a lot of LOs don't flag up front:

Bank statement — gross deposits vs. net. A deal quoted on gross usually prices different once UW scrubs transfers, refunds, commingled personal. Knowing the deposit pattern before quoting saves everyone a week of back-and-forth.

DSCR — quoted rent vs. appraiser's market rent. If the subject rents 15% above market, the 1007 comes back lower and the ratio tanks. Stress-test at market rent before putting terms in writing.

NOO cash-out — seasoning and LTV tiers shift mid-pipeline more than conventional. Terms quoted Monday can be gone by Thursday if a lender updates their matrix.

The test I'd add to your broker interview is ask for the last three deals they couldn't close, and why. If they can't answer specifically, that's the answer.

Stacy Raskin · Answer

Good points. Some lenders just operate on talking about terms that they will never close on. They wait for the borrower to have paid for the appraisal and to be far enough in the process to change the terms. Important to do your research before working with a mortgage broker or lender.

Also, there are some lenders and brokers that are really good with conventional loans but are not good with non-QM such as DSCR or fix and flip loans. DSCR and fix and flip loans also are not regulated the same way as conventional loans so the rates and terms can legally be changed at any time- even all the way up to the closing day which makes working with a reliable and experienced investment property mortgage broker or lender even more important. Working with a mortgage broker can give options that a borrower may not find on his or her own since some some large DSCR and fix and flip lenders are called wholesale lenders who don't generally advertise to the public.

Michael Manchester · Answer

Thank you!

It is really a shame that so many investors don't cross this bridge until it becomes an emergency.

Mike Grudzien · Answer

Nice insight!