Banks are an interesting bunch. In the old days you knew your banker and you could walk in and get a loan. Those days are over. Now loans are underwritten in an offsite location by a robot with little local input. Either the loan fits in the pretty box or it doesn’t.
If it doesn’t fit you get a swift kick in the pants out the door. What can you do if the loan doesn’t quite fit? What are the primary reasons a loan doesn’t get funded by a bank? Here are 3 tips to get the loan closed.
Why can’t a bank fund a loan?
After the last recession, banks have come under increased scrutiny from various federal agencies while at the same time various laws were implemented like Dodd Frank. All of these changes have made banks more conservative on their lending practices.
Furthermore, there has been enormous consolidation of smaller banks into larger national and regional players. This consolidation has taken the “local” underwriting out of the branches and into more standardized “corporate” underwriting. In a nutshell, getting a loan is much more difficult today unless all of the boxes are checked and you fit perfectly.
What are the top reasons banks are not able to fund your loan?
1.Timing: For commercial transactions to fund it takes 90+ days. Most residential now take around 30 days. In many cases, funds are needed quicker than these timelines
2. Income: Unless you are salaried W2 employee, banks are more cautious with self-employed borrowers and small business owners. As a self-employed borrower or small business owner, your taxes are not always clear cut; there are typically many deductions and your income might be more erratic (for example you got a big sale done one month and then smaller sales subsequent months). In essence, taxes likely don’t reflect the whole cash picture of your financial situation. Many banks struggle with this ambiguity.
3. Credit: I’m still seeing many borrowers with credit that is less than perfect due to the last recession. As we all know many hits were taken as the markets suddenly turned. Even though your financials look great now, your credit is a lagging indicator that likely doesn’t reflect the current state of your financial situation now.
What can you do to increase your odds of getting funded?
1. Get organized: Make sure your presentation is flawless with all the info upfront like tax returns, leases, operating statements, prior appraisals, prior environmentals, etc.. etc… Most lenders have a checklist; go through the checklist and ensure everything is in order.
2. Have a succinct plan/objective: What do you need the funds for? What is the “plan”. You need to clearly/concisely articulate what you are trying to accomplish and have numbers to back it up.
3. Look for a lender that fits your needs: Most lenders have a specialty and are more comfortable with one type of business/property than others. This is also true on location. For example, if you are in a smaller market, a local bank might be the best fit as opposed to a tier one metro area where any major bank understands and would quote. Identify the appropriate lender before submitting a package
If you are unable to get a traditional mortgage, there is an option: private lenders/hard money lenders. As a private lender (also sometimes referred to as a hard money lender) we are able to make loans that might not fit traditional guidelines.
We hold and service every loan and are not a depository institution. We focus on commercial loans (residential investment properties, and commercial properties). Since we hold everything in our portfolio, we can make loans that make sense for the borrower without the rigidity of more traditional lenders.
I’ve put together 3 tips to help get your transaction funded when conventional sources are not an option.
3 tips to get funded when a bank or conventional lender says no!
1. Identify your objective: My first question I ask any borrower is “what are we trying to accomplish with this transaction?” That is the driver of the entire discussion going forward. I then ask, “how can we accomplish your goal?” This provides the variables that we can utilize for the transaction. For example, does the borrower have a commercial property? A rental property? Other property?
To be successful in any loan transaction it is critical to focus on what the borrower is trying to accomplish and work with the various pieces of the puzzle to reach the goal.
2. Think outside the box: With the objective and pieces of the puzzle, it is important to think outside the box and see how you can accomplish the goal with the various pieces. For example, I’ve done loans where the borrower needed a small amount (assume 200k) and they had a commercial building with tons of equity. They also had a great low rate SBA loan.
Instead of financing the commercial building we were able to finance another rental property they had that had very little debt. This allowed them to keep their low interest loan and still get the cash they needed quickly.
3. Know the source and run from upfront fees: Private Lending/ Hard money lending is radically different than traditional banking and therefore as a borrower you need to be more cognizant of who you are working with. Many lenders can promise the moon and fail to perform so make sure you are working with a trusted lender reputable lender).
Also, never provide money for “upfront fees”. There are many lenders that want you to pay a fee for “due diligence”. This is a scam that should be avoided. A reputable lender should never ask for funds upfront to review the transaction.
Banks are a conservative bunch in their lending practices and have become more cautious due to various government regulations. This has led banks to “chase” A paper transactions that fit in a nice package and shun transactions that do not quite fit their guidelines. Fortunately, there is an option to get transactions funded through non-bank lenders. By following the three steps above you can drastically increase your odds of success.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek, the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview Lending is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.