question about bank loan committee

7 Replies

We are working on a deal for a commercial loan for a 20 unit property. This is the first time we have tried to buy something this big. Our loan officer and underwriter said they will be taking our deal to the loan committee next week and we should have an answer by the end of next week. I am (as always) biting my fingernails hoping the loan is approved and then it came to me... there are loan officers and underwriters on bigger pockets that might be able to shed some light on this mysterious (to me) process. When a loan officer goes to committee, how often does the committee shoot down the loan application? Does the loan officer take any semi-reasonable deal presented by a customer or do they screen heavily and only take those deals they think are good ones? Are they "graded" on how many deals they can get approved? Should I be encouraged that it is going to a committee or does this always happen? 

Hi Jill,

 Ah, the loan committee. This is a regular step for many bank lenders. The hard truth here is that the process varies by every lender. It really depends on the bank, and even on the individual loan officer, to know how often a deal will be killed in committee. If you're on your own (without a loan broker or capital advisor) and this is your first deal with the bank, especially on your first larger deal, then you are at your highest risk.

 A few mitigating factors to reduce the risk of the loan dying in committee:

1. Start the process early - if you're counting on this coming through or risk missing a closing for an acquisition, that can cause reasonable stress. Until you have a commitment letter, you don't have a loan.

2. Disclose everything relevant up front - anything that comes as a "surprise" on the deal later on with the bank is bad news. Banks love certainty.

3. Collect multiple term sheets - relying on a single point of contact with one bank is great... if that always worked out. The truth is, a loan can be killed before, or after, you've paid an application fee. That's why it's prudent to gather a few competitive term sheets, and also gather more information about the bank's track record closing commercial loans. If you aren't able to accomplish this on your own and would prefer a single point of contact, that's where loan brokers come in.

When we arrange commercial loans for our clients, we don't tell them they "have" the loan until the commitment letter is issued, and we set expectations and have contingency plans in the case where a loan falls through. We also advise selecting an institution not just for the terms they lay out on paper, but for the track record we've seen from them in the past. Saving ten basis points is not worth trading for 10% more certainty, in our opinion.

 Please report back after committee!

 - Tim

Hi Jill - this is a great question! It might be helpful for others looking to provide their thoughts to know what type of bank/loan you are working with. 

I will try to provide some perspective from my experience as an institutional lender with one of the largest banks in the world and as a commercial real estate hard money lender with iBorrow.

At the bank, me going to loan committee means that I have vetted the real estate, borrower, and my proposed loan structure with what is usually an office or regional manager. I may have even provided a quick informal preview to the "Credit" team prior to putting together more formal material and a formal Credit call. Once I and my production team are pretty certain that we are at least close to "there" on terms, proceeds and structure, we will setup our credit call to get the credit team's blessing and answer any more specific questions they may have. 

This is just me and my process personally - at that point that I was going to Credit, I knew that there was a deal for us to offer to the borrower, and I would not be expecting a black and white NO answer. This is for 3 main reasons - 

1) Credit is very busy and wasting their time does not get me on their good side, 

2) Bringing poor deals to Credit sets a bad precedent and creates a sense of suspicion on future deals and makes it harder on me. As a lender, it's all about building trust with your team and your clients through proven results., and 

3) I would much prefer to get a quick NO to a Borrower and point them in the right direction than string them along in the hopes that I get something past Credit. 

Different institutions will have a different process, but hopefully you are working with a good financial partner in your bank/lender that has shepherded you and the deal through the process efficiently and honestly.  

Hello--taking your questions in turn--

How often shot down--This depends on your loan officer and how well he's prepped the underwriter and committee. Good lenders know what they can get approved. @Ryan Kurth is right--too many committee declines ruins your credibility.

Does the loan officer take any semi-reasonable deal---Yes, some do. 

Are they graded--Typically, loan officer comp plans are base plus commission, structured so that you can make an OK living with the base but the commission really buys the house, car, kid's education, vacation. Commissions are only paid on closed deals, not approved ones. There is also the quarterly nut--meaning if you don't make a minimum level of closed loans, you're shown the door.

Should I be encouraged--Yes. but so much depends on your loan officer.

A note of caution--It's not over until the loan closes and funds. After 40 years as a lender and borrower, I've seen approved deals tank on sudden changes in terms, pricing, failed appraisals, environmental issues, undisclosed bankruptcies, criminal records and a host of other unforseens. Good to have a few lenders working on your deal.

@Tim Milazzo , @Ryan Kurth , @Ken Jernigan

Thank you all so much for taking the time to answer my questions. I had to leave town for a funeral and just now saw I had replies!

My lender is Wayne Savings a community bank in North East Ohio. They funded our last deal in April which was for 13 units in the same neighborhood. I haven't worked with any other commercial lenders because I was hoping to establish a relationship with a local lender that I can count on-- and this bank was easy to work with and gave us reasonable terms last time: 20years - 5year adjustable at 5% with 25% down. The underwriter sent us an email with the amount we'd have to put down plus the equity they were willing to use from our other properties and in bold font it said that this assumes the property appraises at or above the purchase price. I think these properties will appraise because in April we bought a number of units just down the street for $3500 more per unit. The apartments we are looking at now were built by the same builder but they are much newer (2004) and they have 2 car garages instead of 1 cars but they have much less land per building than the units we purchased in April. I think our biggest down side is that we have more credit card debt (20K) than we did in April due to funding the move for another retail business and funding some renovations on recent purchases but we told the bank we could pay it down if need be-- however we would prefer not to because for the rest of this year it is cheaper for us to use credit so that we can defer additional retirement withdrawals until after the 1st so they'll be in the next tax year. We also have greatly reduced our IRA funds because we are spending them on apartment downpayments.

The DSCR for the deal (calculating expenses at 50% of gross rent-- which is probably a little high) is 1.32% which is slightly better than the 1.25% the bank told us they required.

IF they don't fund the deal, it sounds like it might be worthwhile to try a different lender or possibly a mortgage broker? Only two more days. Still waiting nervously.

I will let y'all know how it goes thanks again for your insights.

Hi @Jill F.

I agree with the above posts and to consolidate based on what appears to be your main concern:

1.  Lenders are incentivized toward getting your request approved.

2.  With a good lender, committee should essentially be a formality.

As @Ken Jernigan said, it's not over until it's over.  Committee is just a step in the process, don't fret too much over it.  

Let us know how it goes!

@Tim Milazzo , @Ryan Kurth , @Ken Jernigan, @Kiley Nakamura

I wanted to report back that I got some good news. The underwriter said that our deal was approved by the loan committee, he said our loan officer would call after Christmas with the terms. They gave us reasonable terms on our last deal so I am very hopeful that the terms will be good this time as well. Thank you all so much for your input. It made the waiting a little easier. :)

Next, I'll start worrying about the appraisals...

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