The commercial funding process can be complex enough without knowing which questions to ask once you have identified a potential lender. Wise borrowers take the time to understand the nuances of potential loan terms and balance against what they need and want. If you have more than one offer to choose from, ideally you’ll want to compare the two proposals to understand there differences and assess which loan offer best suits your purpose.
For that, here are a few key questions to ask before you choose your private commercial mortgage lender.
1. Is The Lender A Trusted Source?
Banks and other government regulated agencies like Freddie Mac and Fannie Mae operate under strict regulations. Securitized lending products, like CMBS, also operate under certain industry governing guidelines. However, private lenders who lend for their own account do not have the same guiding principles. When dealing with private lenders, you may be enticed by quick closings and below market rates, but beware that all may not be what it seems. Performing a little due diligence on these lenders can help mitigate these risk and give yourself peace of mind.
- Length of time in the lending business and track record
- What types of loans they offer
- Loan sizes, rates, and terms
- Company rating; customer testimonials or recommendations
2. Is There A Prepayment Penalty?
In the ideal situation, you’ll be able to pay your loan off a little early, which will save you interest charges. That savings can be significant when dealing with private lenders, which typically have higher rates. However, you may be restricted from prepaying early or you may be required to pay a prepayment penalty. Many hard money / bridge lenders require at least 6 months’ of interest. In other cases, you may have to guarantee interest to the lender for the entire term of the loan.
Keep that in mind, especially for a property that is being repositioned and where you expect to refinance into a lower cost permanent solution. In other words, even a higher rate option with a limited prepayment restriction or penalty may be a better long term solution versus a lower rate option with a lengthy prepayment restriction or a hefty prepayment penalty. Do the math and understand all of the potential costs.
3. What Are The Potential Lending Options?
Depending on your particular deal, you may have several potential options to choose from. For example, with multifamily lending, there are variety of potential lending solutions. The lowest rates are from banks, credit unions, Freddie Mac and Fannie Mae, CMBS and life insurance companies, though these are typically heavier with documentation. The mid-tier rate products include those from various “stated income” lenders that offer long terms and no balloons (up to 30-years) and with limited documentation. Hard money and bridge loans are typically the highest rate products, have very short terms, but offer very limited documentation and quick closings.
4. How Many Hoops Do You Have to Jump Through?
Applying for a commercial real estate loan is time consuming—time that you don’t have. Most lenders have a seemingly endless parade of hoops that applicants have to jump through before they even find out if they might qualify. Find a solution that allows you to explore your options while allowing you to avoid going lender to lender (ahem) and wasting lots of value time.
5. Is Your Property Type Supported?
Lenders are notorious for changing their risk profiles randomly and without notice. Imagine going through the entire loan application process only to be informed that you’ve been denied because the lender is overallocated on your property’s type. Or their lending limit was suddenly changed. Or that they are no longer lending in a certain geo-market. This is where an experienced advisor from Raisal can be valuable. We will make sure lenders are hungry for your deal by using our sophisticated matching algorithm that is updated as lenders change.
Property types that Raisal lenders support include:
6. How Long Will it Take to Close?
As a commercial real estate investor, the closing timeline is often crucial to the successful implementation of your investment strategy. You don’t want to think you’ve locked in a perfect loan, only to have it be delayed for months on end while someone else swoops in and takes your real estate deal. Worse, once you’ve accepted a loan, it’s often too late to back out due to a slow closing. Find out ahead of time, in writing, the estimated closing timeline. Getting a definitive date can be challenging in the early stages, but you should be able to obtain an estimated range.
The typical closing time for a private lender could be anywhere from 14 to 45 days. Unless a delay is due to title or some contractual issues, delay from the lender is never a good sign.
At Raisal, you submit one loan request and our experienced team handles the details. You won’t have to worry if your lender is trustworthy, doesn’t support your property type, or asks you to jump through endless hoops only to deny you in the end. You get the financing solution you need, in less time.