The Top 10 Questions You Need to Ask Your Commercial Mortgage Broker

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Before you put an apartment building deal under contract, you should clearly understand your potential lenders’ loan terms and underwriting criteria.

Imagine this: You put a deal under contract and you assume a down payment of 20%, and you later find that you’ll need to put 30% down. Or that you don’t personally qualify for the loan and you’ll need to find a co-sponsor. Or that the lender requires a 6-month reserve that you didn’t count on.

While sometimes ignorance is bliss, in this case these kinds of surprises could cost you a deal. And when you’re doing a deal, you don’t want surprises like these.

The lesson learned is this: clearly understand the terms of the potential loan and how the lender will “underwrite” the deal.

To “underwrite” is a fancy term that refers to how the lender assesses the risk of project, what they require of you as the sponsor to mitigate those risks, how it satisfies their lending guidelines, and the ultimate terms of the loan.

Related: Real Estate Financing: How to Choose Between Bankers, Mortgage Bankers & Brokers

In order to understand your lender’s underwriting criteria, make sure you network with potential mortgage brokers or lenders long BEFORE you start making offers on deals.

10 Questions You Need to Ask Your Commercial Mortgage Broker

In your interview with your commercial mortgage broker, ask them these 10 questions:

  1. What are the basic terms I can expect for a typical loan? Specifically, what loan-to-value (LTV), interest rate, term, and amortization can I expect?
  2. Is the loan non-recourse, or does it have to be personally guaranteed?
  3. What are the costs of the loan? Specifically, what are the origination fees (typically 1% of the loan), and what is the cost of 3rd party reports, such as the appraisal, structural and environmental reports, and legal fees?
  4. What size loans do you typically do, and in what areas?
  5. What are the prepayment penalties if you decide to refinance or sell before the term of the loan?
  6. What are your liquidity and net worth requirements? Typically the lender will require the sponsor(s) to show liquidity of 10% of the loan and a net worth equal to the loan balance.
  7. Do you require any reserves or minimum account balances? Some lenders want you to deposit 6-9 months of interest payments into an escrow account and/or keep a minimum balance in the bank account. Some also want you to bank with them as a condition of the loan.
  8. What is the typical time to close from the time I order the appraisal? Normally loans take 45-60 days from the time the appraisal is order to close. Make sure you know the timeframe for this lender.
  9. How do you define a “stable” asset? Typically assets that are at least 80% occupied are considered “stable” and anything less occupied is considered “distressed.” If you’re talking to this lender about a conventional loan for a “stable” asset, make sure you know what they consider “stable.”
  10. What kind of loan products do you provide? Lenders could provide one or more of these loans: conventional, Fannie Mae/Freddie Mac loans, FHA/HUD loans, bridge loans, and/or construction loans. The more products a broker can provide, the better.

Related: What Mortgage Lenders Look For When You Apply For a Loan

Keep copious notes, and then add the answers to each of these questions to a spreadsheet where you track the nuances and terms for each lender. Do this for 3-5 lenders and you’ll get a good idea of what’s “normal” and what might be a bit unusual.

Conclusion

Now that you have the answers to all of these questions, you will better understand your lender’s requirements to ensure you qualify for the loan and you know the actual terms. Then, once you have a deal under contract and time is of the essence, you already have a relationship with the broker, you already know what terms to expect, and are confident that you have a very good chance of being approved for the loan. Following these steps systematically will dramatically increase the chances of closing the deal.

Are there any questions you ask your commercial mortgage broker not listed above?

Let us know with a comment!

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

9 Comments

  1. Very useful list. Thanks!
    My commercial loan also requires a yearly personal financial statement. Do you know if this is a federal requirement, or just my local banker’s rule?
    Another good question is whether a cash down payment is required or if pledging assets can be substituted for the down payment. Also, can the down payment be waived if the property appraises for enough higher than the purchase price?

  2. Courtney Marous

    Great article. I practice CRE in South Carolina and only deal with Industrial-Flex properties, but in my experience, if obtaining bank financing, the lendor will also require an environmental Phase I & II be conducted on the property. Most banks/institutions will have specific requirements that may vary from bank to bank so it’s wise to incorporate this conversation into the above.

    Interested in learning more and thanks again for sharing! -CLM

  3. This is a very well written blog post – as a CM Banker, I would say the one place I run into issues is on the credit of the borrower – in addition to items 6 and 7 I would insert “What is the minimum credit score required”. This is typically somewhere between 640-680, at a MINIMUM, but some programs have very strict guidelines and may require higher.

    If you are dealing with a bank, they are often driven by regulation (read: what won’t raise a red flag with the a regulator) and will often shut down a loan request at the door because it’s not worth the perceived head ache – hence the reason to use a broker who will know a lender willing to work with a little bit of hair on the deal – often at a slightly higher interest rate. In MN, what would be a standard 5 year rate of 4%, might raise to 4.75-5%. For the record, the lowest credit score I’ve seen a bank lend on in the last 12 months is 589. (5 years fixed, 20 year amort, 4.85% – multifamily property in MN). There was obviously a story to the credit score that the bank was able to get comfortable with before lending…

    Other quick responses:
    -Michelle: Personal financial statements and yearly requirement per banking regulations – Banks need to keep tabs and prove they are keeping tabs on their borrowers!
    -Courtney: If a Phase 1 or 2 has previously been ordered and you still have a copy, a good mortgage banker/broker SHOULD be able to negotiate with the title company the use of the previous report, cutting out the additional $1,500-$10,000 requirement – if nothing material has changed to the property

    Great Post Michael

  4. Hey Michael Blank,Thanks for a great article.You have shared very useful article.You can also add “how do you handle rate locks i.e.you can tell your broker to fix a certain rate on certain date.if rate dips by lower rate then your broker must fix it in lower rate.”

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