Commercial Mortgage Lender

Top 10 Questions To Ask A Commercial Mortgage Lender

Before you meet with potential lenders, know what information you need to know and what questions you need to ask. Doing this ahead of time and sticking to your list of questions will help you better evaluate each lender’s respective qualifications, products and specialties. Again, the goal is to determine which lender meets your overall financial needs.

Here are the top 10 questions you ought to ask of potential commercial lenders:

#1 “Have you worked with many other small businesses?”
It’s important that you work with a lender that understands businesses like yours. Big-time corporate lenders find it difficult to sympathize with the struggles of an entrepreneur, and they are likely to give preferential treatment to their larger corporate clients.

#2 “What is your experience in my industry or with my type of property?”
Although it’s not necessary that a lender has experience working with other borrowers in your specific industry or who bought similar types of property, it is definitely a plus. A lender who has a track record of working with borrowers like you will be able to anticipate the questions and concerns you’ll have during the loan process.

#3 “What is the timeframe for this loan process?”
Each lender may have a different timeframe for processing your Pre-Approval and loan application. You don’t want to deal with a lender who won’t make your loan a priority. You should make your expectations clear up front, and come to an understanding with your lender as to what is a reasonable timeframe for your loan.

#4 “What is the typical Loan-to-Value (LTV)?”
Loan-to-value is a calculation that divides the loan amount by the appraised value of the property you want to buy. For example, let’s say the property you’re considering costs $500,000 and you are putting down $100,000. Your LTV ratio would be 80% ($400,000 is the amount to be financed, which is 80% of $500,000).

Typically, a lower LTV (higher equity injection) will enable you to get a lower interest rate. For example, many banks will require as much as 25-30% down. This lessens their risk and makes them more comfortable with giving you a competitive interest rate.

NOTE: Some loan programs (such as the SBA 504 loan) deal with Loan-to-Cost (LTC) rather than LTV. This means that the lender is financing a portion of the total project cost (construction/acquisition, tenant improvements, equipment, soft costs, and closing costs) as opposed to the appraised value of the property. This is extremely beneficial to you as a borrower because your out-of-pocket costs go down dramatically. Again, your capital will be better used elsewhere in your company — not tied up in your commercial property.

#5 “Is this loan assumable?”
If one day you think you might sell your property, an assumable loan will let you transfer the remainder of the commercial loan balance to the new owner. You always want to have an exit-strategy, and this is a great selling point down the road, if you decide to sell your property.

#6 “Are there any financial covenants?”
Beware of lenders that want to include financial covenants in your loan. This means they deem you pretty risky, and they want to be able to check up on you to make sure you’re able to pay back your loan. It basically amounts to lender micromanagement. Avoid these if at all possible.

#7 “Do your loans have balloon payments?”
Some lenders will give you a good deal on your loan, but include a balloon payment. This means that you may enjoy very low monthly payments for 5 years or so, but after a set amount of time you’ll be hit with a rather large lump-sum payment. Loans can be attractive from far away. Balloon payments are often so large that business owners must refinance the debt with another lender, which means more closing costs and fees.

#8 “What do you need to Pre-Approve me?”
Getting a Pre-Approval should be easy and shouldn’t involve a mountain of paperwork. As discussed previously, you’ll need to submit some basic documentation, but this process shouldn’t take more than 2 or 3 days to complete.

#9 “What loan products do you specialize in?”
The answer to this question should not be, “Oh, we offer 145 loan options!” You want a lender who specializes in the best products available. That way, they’ll know each product inside-and-out, and will be able to easily recommend which one is right for you.

#10 “Can I talk to your past clients?”
The best people to ask about a lender are the people they have worked with in the past. Try to pinpoint clients that were similar to your situation in some way (industry, type of property, etc.). That way, you’ll get a good idea of what you can expect your experience to be. When you talk to the clients, here are some good questions to ask:

• Were you treated fairly?
• Was the lender helpful with the application and paperwork?
• Was the loan process completed in a reasonable timeframe?
• Would you work with the lender again?

Again, you want your commercial mortgage lender to essentially “partner” with you to complete the loan process. You ought to feel like you are in good, capable hands throughout the process. Asking good questions on the front-end will make sure you get the best treatment and experience from your chosen lender.