Number three on our list the borrower has poor credit
There is an immediate reason why a deal will fail, BAD CREDIT. Bad credit will kill a deal faster than anything else, so what exactly is bad credit. Bad credit is different for each type of deal, but let’s starts off with a discussion of credit first
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they’re named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk). Credit scores only consider the information contained in the credit profile. They do not consider income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status.
Credit scoring was developed as a way to consider only what was relevant to somebody’s willingness to repay the loan.
Different portions of the credit history are given different weights. Thirty-five percent of FICO score is based on specific payment history. Thirty percent is current level of indebtedness. Fifteen percent each is the time open credit has been in use (ten years old accounts are good, six month old ones aren’t as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit — credit scores requested.
Now that we have given you a brief analysis of credit score where should your score be if you are trying to get a loan? For an SBA Loan most lenders will not even entertain your loan application if you have less than a 650 FICO score. Some are now requiring a 700 FICO score. Another question we are asked a lot about is Bankruptcy.
Can I get a loan if I declared bankruptcy? Generally no, if the bankruptcy is less than ten years old it will stay on your credit record under the section known as public filings. The only bankruptcy that we may be able to get around, and I say maybe is one that was caused by medical reasons. Other than that a bankruptcy will also kill the deal.
For a much more in-depth study of credit and its relationship to getting your next loan approved, read our book GET Your Loan Closed. For a limited time only buy the book and get FREE weekly Commercial Loan Training. Download yours today for $37.00.
Number two on the list is the property does not cash flow
For any investment the buyer / borrower wants to get a good ROI, or Return on his investment. That usually means that the amount of money as a down payment will be returned to a borrower in the form of cash flow from the investment in X period of time. The shorter the period of time the greater the Return on Investment. Well that is exactly what the bank wants as well they want a high percentage of a good Return on Investment – they do not want the property back in foreclosure or default.
How does the lender secure that position? They ask that there is an excessive coverage of cash flow to support the debt service of the project. This is more commonly known as debt service coverage ratio. The difference between what the properties is cash flowing and they require debt service for the loan is known as the coverage factor. Most lenders typically are looking at 1.25% to 1.35% DSCR
What does that mean? Very simply for every dollar of debt service that is required you need 1.25 to 1.35 in cash flow. For example a $500,000 loan at 6.0% amortized over 25 years has an approximate payment of $3,225.00. To meet the loan payment of $3,225.00 a property would have to have total cash flow available for debt service of at least $4,200.00 and that is at 1.25% at 1.35% the amount of cash flow to support the project will need to be over $4,350.00 per month.
If the property after all expenses does not have an additional $1,250.00 approximately the deal will not be considered to cash flow. Many times a borrower is going to do their own due diligence and when they figure out their cash flow the project easily supports the requested debt service coverage ratio, so why would a lender turn down a deal for improper cash flow. There are actually many reasons, but they all boil down to this – the lenders expenses that are deducted from the cash flow are not the same as the borrower had deducted.
This will be a topic of another blog post in the near future after we conclude the Letterman list. Make sure you read our book GET Your Loan Closed for an exhaustive study of the way a lender treats cash flow.
Number one on the list is the buyer does not have the proper down payment
Why is this number one on the list, because without the proper down payment no lender will look at the deal? The down payment will ultimately yield what the Loan to value the client can measure up to, not necessarily what Loan to Value the lender is going to offer. So tonight I want to examine the area of down payment from the requisite amount for each type of loan to what loan to value really means in application.
First let’s explore what the down payment can consist of. Very simply, Down payment is CASH. Many of our prospective clients think that down payment can be the difference between what a property is bought for an increased appraisal amount. Those days are gone. Down payment is only a cash contribution. In the event of a client who owns a piece of land and is building a project, equity can be considered the free and clear land as well as any monies that the client put into the development project that is directly related to the project being built.
Secondly, what down payment is required for what type of loan?
SBA Loans – Business Opportunity – a minimum of 15% contribution by the borrower and 10% by seller or at least 20% by the borrower without any seller carry back. There can be exceptions to the 20% if the business is strong and cash flowing
SBA Loans Real Estate Purchase or Refinance – a minimum of 10% down, as long as not single purpose such as hotel, motel, bowling alley etc. If single purpose most likely the lender will want to see at least 25% down
Commercial Loans – a minimum of at least 25% to 40% depending on the cash flow of the project and the strength of the borrower as well as the future deposit relationship
Lastly for commercial loans the published loan to value maximum that a lender may advertise may not be the actual loan to value that you are going to be subject to. The reason is that loan to value; contribution or down payment will all be dictated by how much cash flow, debt service the project can support.
For more on down payment and contribution get our book today, GET Your Loan closed, and now for a limited period of time includes free weekly commercial loan training.
The battle for Night-time host is heating up, I decided that I was going to take a stand and side with David Letterman over Conan, & Jay Leno. To show my allegiance to Dave I am going to be posting in a style that I know he would approve of. For those David Letterman fans here is my top ten list of why deals will fail.
Number one on the list is the buyer does not have the proper down payment
Number two on the list is the property does not cash flow
Number three on our list the borrower has poor credit
Number four on the list is the property does not appraise at the purchase price or better
Number five on the list the borrower does not have enough closing liquidity
Number six on the list is the property leases are not long-term but are month to month
Number seven on the list the borrower does not have the requisite experience
Number eight on the list the property is in an undesirable location
Number nine on the list the borrower’ personal needs are too high
Number ten on the list is lack of collateral for both Business and Commercial loans
Over the next ten days I will be thoroughly examining each of the above reasons why deals fail. We are definitely starting to see a trend again with lenders tightening up, it’s almost like they ae preparing for a major fall again. Let’s hope not! Good loans can be closed, it’s just that the lenders are under such scrutiny today with the FED watching everything that the lending community is being very very cautious. However, a good SBA Loan will close every day. With 90% Guarantee and no SBA Guarantee Fee it is your best loan out in the marketplace.
Please pick up our book GET Your Loan Closed, so that you will not fall victim to the top ten list above. Buy it today for only $37.00 - immediate download
I found this piece that was sent to me about two years ago and I have updated the ratios and the numbers to meet today’s exciting environment. The concepts still work, so take heed. These are Commercial Loan Words of Wisdom, which are becoming part of my next piece. “The mistakes that borrowers make” which I will be sharing in January with our clients and centers of influence.
But tonight make sure that you download our book GET Your Loan Closed!, and with each purcahse receive FREE weekly commercial loan training, or visit loanforbiz.com for much more on commercial loans.
Now the words of wisdom:
No such thing as 100% financing
If you have scores below 600, expect much higher rates if a lender can even be found for your project.
If you want a construction loan, you will need at least 30-40% of total project cost. If you don’t have that kind of equity you’re looking at too expensive of a project. High leverage construction loans are only available if you have high net worth and are an experienced developer. PS this was changed from 20 to 25% when the article was first written.
Small loan amounts are often the toughest to work and have the most problems. Don’t waste your time on loans under $200,000
Apartment loans normally take 60 - 90 days from time of signed LOI (letter of interest). If you get a call that requests under 45 days, it’s possible but difficult. I have seen loans close in less time, but the appraisals cost extra, and everybody has to get documents in on time. If one link in the chain breaks, 30 days will come quickly.
Lenders order the appraisal. The typical turnaround is 3-4 weeks.
Always look at purchase contracts ASAP. If they’re short, you will want to have the buyer request an extension and make sure everybody is on the same page. Deals blow up because sellers will not extend contracts, and buyers assume they will.
Commercial loans generally take 60 - 90 days.
When talking about LTV, just because guidelines say 75%, doesn’t mean the borrower will get 75%. Every deal is based on the cash flows (net income) of the property. I can lend up to 70% or 75% on most types of property, but many times (used to be sometimes), cash flows support much less. Before you quote LTV’s or max loan amount, show us the figures.
Seven Requests for Church Financing are being pre-underwritten in our office; refinancing and new purchases.
The only thing that comes to my mind why we have so many requests for Church financing is that during economic crisis people are turning more to religion, they are trying to get back to the basics, and there is no better way than visiting your Place of Worship.
Can we finance your Church, Synagogue, Mosque etc.? Well it depends. Tonight’s blog will deal with the financing of these non-profit organizations. Most non-profits are deemed that way for tax purposes and as such are known as 501 C-3’s. There are other IRS code numbers as well depending on the type of non-profit but for our discussion tonight just be aware that they are known as 501 C-3’s.
So the question begs of itself how can a non-profit get financed? First of all the financing for this type of organization will be completely different than a financing for a profit organization. The documentation for a Church loan is very different because the Church or affiliated organization does not want to show a profit. If they show a profit they can theoretically lose their non-profit status.
So if you understand this at the outset you have a leg up on your competition that may be going after the same client. The key to the smooth financing is to understand how a Church, Synagogue, or other religious organization gets their capital to run their daily operations. By understanding the source of their monies you can structure a loan to meet their fiscal needs. Most organizations meet their fiscal obligations through donations. If you can document the donations, see the trend in the donation and be able to extrapolate future “earnings”, a case can be made for the loan, because this is the source of repayment for any future debt.
Also, projections are also going to be questioned and looked at very carefully for a new or an existing institution. I recommended today to one of our clients to establish a restricted account for the building /capital contribution account. Lenders want to see that for a new purchase that there is this type of fund established and that they have been funded with congregant’s donations. By restricting the account, the board of the Religious institution cannot use these funds for other than what they were restricted to – in our example the purchase of a new building.
The other major point to remember is that there are a limited amount of lenders that specialize in this particular area. The reason is that NO ONE WANTS TO FORECLOSE AGAINST GOD; this thought must never be forgotten when dealing in this arena.
For more on Church and Synagogue loans visit loanforbiz.com. Get FREE commercial loan training with the purchase of our book GET Your Loan Closed!, buy yours today at http://www.getyourloanclosed.com.
Tonight we continue with our theme of debt refinancing. Last night we talked about SBA Business Loans and debt refinancing now we shift our focus to commercial real estate loans.
Commercial Real Estate Loans or Investment Property Loans offer a greater chance to refinance them providing you meet certain qualifications and time frames. Both the qualifications and the time frames have changed drastically within the last six months as everything else within commercial finance has.
Before we could re-appraise a property and if there was equity we would be able to refinance any existing debt as well as give our client additional capital providing there was sufficient equity in the property. Loan to Value ratios bordered on 75% to 85%. Lenders were not concerned about the use of the cash out an as long as you were current on the loan, had good credit and the property appraised at more than what you originally purchased it for the deal was done rather easily.
NO MORE
Now most lenders will not even consider a debt refinance if you have not owned the property for at least two years or longer. Next even if you owned the property for two years or more they want to know exactly what you paid for the property and then they calculate what increase in value they believe is really there not necessarily what the appraiser says is there.
Next they look at the net operating income of the property and add at least another 15% to 20% to the bottom line expenses. then they examine your tenants and how long they have been a tenant as well as when their lease expires and the length of the tenancy.
Now the most important point! If they believe that you are using the money from the cash out for other than improving the property (increasing the value to the lender) they are not in favor of doing these loans at all. Paying yourself back for expenses directly associated with the property is OK, but using the money for paying outside debt is no longer looked upon favorably.
For a great deal more information on qualifying for a commercial loan, download our latest book, GET Your Loan Closed! for $37.00, Download today - be smarter tomorrow. For a limited time get FREE Commercial Loan Training with the purchase of every book.
So can we get cash out of our properties to pay off debt? Seems like this is the most popular question we get every day. And of course I will have to answer to the client it depends? So rather than just leave you with that answer I will attempt to shed some light on the question.
To get money back for a loan that is going to be approved by the SBA all debt will have to be 100% business related. In addition to be 100% business related it will all have to be documented, as well as traced from where it was borrowed from to what it was used to pay for.
As of the new SBA SOP in October of 2009 debt refinance of a seller carry back note cannot be effectuated until the note is older than two years. So the borrower, i.e. the new owner of the business cannot refinance the seller carry back note as a debt refinance for at least two years. In addition the payments for all two years must be totally current. As for other debt keep reading.
Credit card debt which is usually a much higher interest rate can be refinanced if the debt was a business debt. The SBA lenders want to see that the money was actually used in the business for purchasing tenant improvements, equipment, inventory anything that can be turned back into future company profits. On the other hand debt that was used for other purposes is much harder to refinance through an SBA refinance.
For example if the money was used for salaries rather than equipment it may be much harder to get the money back through a refinance.
So before you ask for a debt refinance as part of working capital for a small business loan make sure you can properly document the need as well as the past expense. The other requirement for debt refinance for SBA loans is that the SBA can only take out a loan that is more expensive then the new SBA loan proposed. Not only must there be a substantial savings between the two loans, the terms of the SBA loan also must be better.
Just know that it’s getting harder and harder to establish the refinance of an existing loan with a new SBA loans.
In my opinion it’s better to refinance a non-SBA loan with cash or cash equivalent and then apply for an in increase or a new SBA loan that has nothing to do with a debt refinance but a request for expansion capital etc. The request will most likely be approved if it’s for a growing company with strong financials; this most likely will not work for a start up operation.
To learn what it takes to qualify for any commercial or business loan, get our book GET Your Loan Closed!, and start closing more loans today. Now for a limited time our book comes with FREE Commercial Loan Training.
It’s not as easy as you think!
Continuing with last night’s blog, we will now discuss the term of the loan. The term of the loan is important for a couple of reasons. The first and obvious one is when the loan will be paid off. All SBA Loans are fully amortizing loans so at the end of the term the balance is zero. But more importantly as to when the loan is paid off is the calculation of the payments.
The longer the amortization the lower the payments, but what happens when you have two purposes for as in our example from last night. The real estate for 1.5 million and the working capital for $700,000. If these were treated as two separate loans the real estate would be 1.5 million less 10% for the equity contribution would be amortized at 25 years, while the business opportunity would require 15% equity injection would be amortized for 7 years.
Let me put this in a perspective which is perfectly clear to demonstrate the true effect on the payment with varying amortization periods
1. Real Estate $1,500,000 – 10% equity injection or $1,350,000 loan amount payment =$8,700.00 approximately at 6.0% amortize for 25 years
2. Business Opportunity $700,000 – 15% equity injection or $595,000 loan amount = $8,700.00 approximately at 6.0% for 7 years
The same payment but the difference in loan amounts is almost double. The reason for this is the amount of loan periods that payment are to be made over 300 or 12 months time 25 years, versus 84 or 12 months for 7 years.
So, together the two loans would be approximately $17,500.00 per month for the first 7 years then $8,700 continuing for the remaining 18 years assuming interest rates don’t adjust for the loan period which is highly unlikely. But we will save that for a further blog.
However with the approval of the new SBA SOP effective October 1, 2009, for any combined loan the term of the entire loan is dictated by the type of the largest portion of the loan. In our example the real estate loan is much greater than the business opportunity so the entire loan of $1,945,000 is now amortized over 25 years for a loan payment amount of approximately $12,500.00 per month a sizable savings from $17,500.00 per month.
For more on the above please pick up a copy of our book GET Your Loan Closed! which only talks about commercial and business loans. Now for a limited time including with the purchase of the book is FREE Commercial Loan Training. Download yours today, only $37.00!
As you know we are sharing practical examples that occur in our office on a daily a basis to help educate on the various nuances of commercial financing. Today observation was brought about because we have a potential client that is looking at buying a couple of building as well as asking for working capital.
The clients concern was the amount of down payment he would need as well as the amortization for the various loans he is considering. Further information is needed for you to understand the analysis that we presented.
Clients Desires:
1. Purchase of Real Estate valued at 3.5 Million to be sold for 1.5 million
2. Working Capital for $700,000
So let’s discuss contribution which is a fancy way of talking about the down payment for the loan. For the Real Estate portion we will need 10% minimum contribution or $150,000. For the working capital we will need to show the client has 15% o the $700,000 or $105,000 available in equity or cash in his company. Therefore the minimum total down payment would be without costs $255,000. In actuality the down payment will be higher because it is based on total project cost.
The prospective client immediately stated that there would be enough equity in the deal without a cash injection because he was picking up the property at a “fire sale”. I then had to explain that the lender will use the purchase price or the appraised value whichever is less. So the client would have to come up with cash for the down payment.
This is a very common misconception that borrowers have. They believe that equity in the acquisition of the property is real equity. The only equity that counts is the amount of money that you are putting down, unless we are talking about a refinance where you have owned the property for over two years, then an appraised valuation is in order.
Tomorrow night we will continue to look at this deal a little further as we examine the combined payments.
All of this information is covered thoroughly in our book GET Your Loan Closed! and for a limited time we are including at no additional cost FREE Commercial Loan Training.
