Asking a commercial lender the right questions can save you time and money
Questions to ask your lender
- What loans won't you make?
- What's your average loan size?
- What documentation do I need?
- How much do you know about my location and the market for my business?
- What's your maximum loan-to-value ratio (LTV)?
- Are you more interested in my credit score, or the value of the property I'm financing?
- How much collateral do you require?
- Are there penalties if I pay off the loan early?
- Is there a balloon payment and, if so, what happens when it comes due?
- How much business do you do through loan-guarantee programs?
- Will you provide references?
- How long before my loan gets funded?
It may not seem like it sometimes, but when you apply for a commercial mortgage, lenders need you as much as you need them. So, the application process shouldn't be a one-sided affair.
Before lenders get around to quizzing you, interview them about their experience, track record and lending standards. After asking a few good questions, you'll get a good idea of whether your loan will be financed, whether you’ll get a good deal and if it's even worth your time to go through the application process – especially with this person.
Following are some suggested questions to ask your lender.
What loans won't you make?
Some lenders avoid mortgages on certain properties. They may like medical buildings, but avoid mobile home parks; make loans for apartment complexes, but not strip malls; or back industrial projects, but forgo vacant land. Save yourself time and headaches and ask about those lending preferences up front.
What's your average loan size?
There'll be some range, so your loan might get funded even if you're seeking a little more or a little less than the bank is used to lending. But if you're seeking millions from a micro-lender, or a pittance from a bank that's used to nine-figure transactions, you'll be disappointed.
What documentation do I need?
It will vary, but all lenders will want some corporate financial documentation, tax records and personal information. Whatever they want, gather up the paperwork first, before you go in to talk about your mortgage needs.
How much do you know about my location and the market for my business?
Look for a lender who's interested in what you do and where you do it. Invite loan officers over for a look at the property and your business operation. The more they understand about what you do, the greater the chances they'll stick with you if you run into a rough patch during the course of the mortgage.
What's your maximum loan-to-value ratio (LTV)?
That's a fancy way of asking, “What's my minimum down payment?” An LTV is the size of the loan as a percentage of the value of a property. If a lender's top LTV is 80, they're willing to fund 80 percent of the purchase price of a property. The rest — in the form of a 20 percent downpayment — is your responsibility.
Are you more interested in my credit score, or the value of the property I'm financing?
Sometimes lenders will overlook a low credit score if the property you're financing, and your equity in it, justifies the risk. But you pay a price for these "hard money" loans (that is, loans that are backed by hard assets) in higher interest rates, closing costs and other fees.
How much collateral do you require?
Typically, you're pledging the value of the property that's being financed as collateral for the loan, and you agree to forfeit the property if you default. But, even with a substantial downpayment, that may not be enough. Lenders often discount the value of collateral by anywhere from 20 to 50 percent, meaning you might have to put up personal property, business inventory, additional commercial real estate or more cash to satisfy the collateral requirements.
Are there penalties if I pay off the loan early?
Often, you'll pay a premium if you deny the lenders their full interest charges by paying off the mortgage before it's due.
Is there a balloon payment and, if so, what happens when it comes due?
Balloon loans are common in commercial mortgages. They're relatively short-term, say five to10 years, but amortized over as many as 30 years. So, a substantial portion of the principle and interest comes due as a final payment, and usually must be refinanced. Find out whether your lender refinances customers' balloon payments, and how often the new mortgages are converted to conventional long-term loans.
How much business do you do through loan-guarantee programs?
Fannie Mae, a government-sponsored enterprise (GSE), guaranteed loans worth $28.9 billion for multifamily projects in fiscal 2015. Other GSEs, as well as the U.S. Small Business Administration and the U.S. Department of Agriculture, also offer programs for a variety of commercial mortgage types. The guarantees are a good deal for lenders, and an experienced loan officer is key to getting them approved.
Will you provide references?
You're hiring the bank. Ask for references, ask your friends and coworkers who have dealt with this lender. Check out how well they've performed for other customers.
How long before my loan gets funded?
At the start of the process, you'll want to know how long it takes to get to the end. You need that information for business planning, especially if you've signed a purchase and sale agreement that limits the amount of time you have to secure a mortgage.