The Lender Says No! Now what?
You have a great loan, everything looks good, the deal is set to close, but at the last minute the bank/lender says no. With today’s underwriting standards traditional lenders such as banks are forced to turn down transactions that they might have closed in the past. This could be due to issues with the property, the borrower’s credit, etc… but in many cases conventional lenders are focusing on straightforward transactions with no appetite for transactions a little out of the box. Fortunately your transaction is not dead just because the bank was unable to fund; the transaction could be a fit for a non-traditional lender (aka: Hard Money Lender, Private Lender, or Bridge Lender).
A non-conventional lender is radically different than a bank or other traditional lender (hedge fund, life insurance company, etc…). Most are privately funded and therefore have greater latitude to structure a loan that works for the client as opposed to having to fit a loan into a rigid lending matrix. Hard Money lending is quite different than conventional lending; a hard money lender focuses heavily on the loan collateral as opposed to the borrower’s credit, etc… As a result, mortgage professionals need to adapt their plan to successfully close more hard money/ non-conventional loans.
Being a hard money lender myself and personally reviewing thousands of transactions a year, I’m always amazed at the number of loans that a traditional lender is unable to fund. I’ve outlined six simple steps that every real estate professional should follow in order not only to increase the number of loans closed, but also weed out loans that are duds.
Six simple steps to increase your funding of hard money loans / private loans:
- Understand the transaction: This is the most critical step and the most frequently missed opportunity. Many mortgage professionals stop at the basic info on the property (property, address, ltv, repayment, etc…). Unfortunately this is not enough, you need to understand why the transaction is not able to be funded conventionally (credit, income, property, etc…) and further understand the borrowers needs and goals. In the hard money arena there are many different ways to accomplish this goal. For example in a recent transaction I reviewed the borrower gave me all the info on their property, etc… which did not provide insight into why they needed the loan (what they were trying to accomplish, etc..). After getting more info on the borrower’s goals, it was apparent the best solution for the borrower was not to finance their commercial property (they had a great low interest loan), they only needed a small amount of cash and had an investment property that could be pledged as collateral. As a result of asking the right questions and understanding the borrower’s motivations, we were able to structure a transaction that met their needs at a much lower cost to the borrower.
- Qualify: After understanding the borrower’s transaction, use the smell test to ensure the transaction is not a time waster. For example I was asked to finance a cute B&B in Ukraine; the broker explained the last six months were a little challenging for the owners, but they were back on track. Unfortunately this loan is a total time sink.
- Identify the lender: Make sure you are working with a real local lender and not another broker. There are a couple items a broker can check on a lender before sending out a deal. Google the lenders name and the word lawsuit or the word complaint to see what is out there. Next ask the lender to provide a property address of a recently funded transaction, go to the county website and you should be able to see who put a loan on the property and confirm they actually closed the loan. Finally, be aware of upfront fees/due diligence fees. Many brokers/unscrupulous lenders charge large fees and have no intention of ever closing the loan.
- Getting a loan is not like buying a car where the lowest price is the best solution: It is recommended to selectively shop around a little to ensure your client is getting the best deal, however do not blast the transaction to many different lenders at one time. For example when I get an e-mail from a broker that has also been sent to twenty other lenders, I often ignore the transaction. In my mind if the deal is being shopped all over there is more to the story and it is a good indication that there is some sort of an issue on the transaction. When you are looking to find the best solution, make sure you look at the total cost of the loan. For example one lender might require extensive environmental, MAI appraisal, etc… where another lender is able to close without these items. During this process you want to make sure the loan fits the goals of the borrower and you are working with a reputable firm
- Commit: Once you locate the lender and the transaction is moving along, make sure to get a hard commitment from the lender with all the terms, fees, etc… spelled out so there are no surprises. Assuming everything looks good take your borrower through the commitment step by step to confirm they are on board and that there are no surprises.
- Execute and Close: It is amazing how many deals fall out in the final step of the process. Once everyone is on board, it is important for the broker/borrower to follow through to make sure everything is ready for closing (llc docs, insurance, etc…).
Any real estate professional can close an a-paper plain vanilla transaction. Although the bank might turn a transaction down, successful brokers will use this as an opportunity to utilize alternative funding to get the transaction done for their clients. Closing the more challenging transactions help you both differentiate yourself and win long term clients.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Fairview 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. To get started on a loan all they need is their simple one page application (no upfront fees or other games).