How do I qualify for a Real Estate Loan?
We receive this question often from our clients along with the initial loan request. Commercial Investment properties are different from your typical home loan request. When buying a home for your personal residence where normally there is no net income being generated from the subject property the lender will focus on the value of the property relative to the loan request, the principal(s) credit history/rating and the overall ability of the principal(s) to repay the loan from
reoccurring revenue sources taking in consideration of all debts of the principal(s). When buying commercial income-producing real estate the lenders often take all of the above in consideration, PLUS the economics of the commercial property up for financing consideration.
You could have a high credit score, abundant re-occurring income, substantial fixed and liquid assets which would allow you to qualify for a residential loan, subject the loan to value of the underlying home. For commercial investment properties understanding the net income generated by the subject is a very important part of the overall loan underwriting process.
While the items above are important we recommend starting with a) identifying any past credit or legal actions in the clients’ past history. If the principals carry a strong credit rating (650 and above), and no credit or court issues we recommend moving right into the actual loan underwriting of the subject commercial real estate. Understanding the economics and how the subject commercial real estate is positioned in the market, coupled with the actual targeted loan request will help us direct the loan request to several of our well over 100-commercial lenders. Our lenders have different and at times unique underwriting requirements and loan products.
Some of our lenders offer non-recourse loans while other require partial to full recourse, some offer long-term fixed rates up to 35 to 40-years, while other lenders only offer floating rate loans. Some lenders are not able to loan more than $3,000,000 while others will not consider a loan request below $35,000,000. Some lenders require you to have a certain net worth (e.g. one or two times the loan amount), while some lenders do not have a specific net worth requirement. Some lenders have specific liquidity requirements while others do not. Some lenders require you have experience with the property type you are financing other lenders do not have this requirement.
Our job is to listen to your loan request. Understand the economics of the subject property, know your background as it relates to commercial real estate investment properties and submits your loan to the lenders that would provide the best end loan product for you.
What information and documents are required before presenting you’re a loan request to our commercial lenders? Start with a detailed personal financial statement. If you do not have a form just call and we can email a blank personal financial statement form. A brief resume outlining the principal(s) background in commercial real estate investment properties is helpful. A common lender request is a Real Estate Owned Schedule. This form is required from the Government Sponsored Entities (“GSE”) such as Fannie Mae and Freddie Mac. Many commercial banks also will request a similar schedule normally called a Global Cash Flow Analysis. The Real Estate Owned Schedule normally includes:
- Property type, address, Acquisition Date, Current Occupancy, details on existing debt, past year income and past year operating expenses with the resulting net operating income (“NOI”) and after subtracting any debt service arriving at the net cash flow. As mention, many commercial banks request a Global Cash Flow schedule. This would generally include the same information as indicated for the Real Estate Owned Schedule plus a breakdown of all other debts, e.g. car payments, credit cards. Additionally, the lenders requesting the Global Cash Flow schedule will ask for an itemization of your income sources.
Without a doubt, if you own much other income producing property’s it can be a time-consuming exercise to complete these schedules. We recommend having the data available, but do not complete the schedules until requested. Not every lender requires these schedules, and some that do require these schedules insist on completing in their forms.
While credit history, experience level in commercial real estate investments, financial net worth and liquidity are important, lenders do not give equal weight to these components when completing the loan underwriting process. Some lenders require three years of complete Federal Income Tax Returns some lenders do not require tax returns at all.
In order to obtain an early indication of what loan terms may be available for a stable income producing investment property start with:
- A current detail rent roll.
- Last two years and year to date detailed Profit and Loss (“P&L”) statement.
- Brief property description including the address, age, unit mix, square footage, land area, off-street parking spaces, and photos are helpful.
- Detailed personal financial statement – showing liquid assets (breakout separately assets held in qualified retirement accounts) completing the financial statement form.
- Brief resume on the principals as it relates to experience with the ownership and or management of investment real estate. For example, Freddie Mac and Fannie Mae would like to see the principals have a history of ownership and/or management of four or more like properties. If the principals do not carry this level of experience a third-party management company may be required. We can provide some guidance on this topic.
- We will assume no negative credit or court issues unless the principals indicate they do in fact have some past issues that will need to be addressed. We can either assist with mitigating these past issues or present to a lender who is accustomed to working with borrowers that have some credit or court issues in their background.
The above information will help us determine which of our lenders would have the best loan product for you. We work for you to place the best loan the market has to offer.
Mike Caffrey – President Caffrey & Company LLC (913) 402-7077 Mike@CaffreyLoans.com