By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
Below is a comprehensive overview of the typical commercial mortgage closing process. We wrote this so you can be better informed and know what to expect from lenders. We discuss the process from the point of initial contact (shopping), when you have to supply money to pay for third party reports, to the closing of your mortgage.
Commercial Loan Process – Step By Step
- Loan submission– The first step of the loan process is to shop your loan request to various banks and lenders. After you’re satisfied and want to move forward with a bank, you’re going to have to provide a full loan package so that they can complete the initial pre underwrite on the transaction, specifically you’ll have to provide: 3 years of business and personal tax returns, year to date financials, personal financial statement compete with authorization to pull your credit, resume, as well as other documents depending on your transaction, such as copy of leases, rent roll, purchase agreement, bank statements verifying that you have the cash needed for the down-stroke. Once the loan officer receives these documents, an initial underwrite will be performed. Also, the file will normally be discussed with an underwriter and or upper management to make sure it fits the basic parameters. This step should only take a few days, but it often takes weeks to months if the borrower does not supply ALL of the needed documentation. As a borrower, you have to supply the full package to the loan officer or your just wasting his and your own time.
- Term Sheet– Assuming the lender likes your loan request they’ll typically issue you a term sheet that lists the basic parameters of the loan such as structure, fixed period, amortization schedule, use of loan proceeds, rates, fees, etc. They will also ask for a Good Faith Deposit (GFD) to make sure you’ve stopped shopping and are working with them exclusively. On most loans below $3,000,000, expect this amount to be around $5,000 to $6,000. On larger deals it should be around $10,000. This deposit is used to cover third party reports such as appraisal, environment report and building inspection reports. If for some reason you think the third party reports will be higher than normally, expect the GFD to be higher as well. The process to receive the term sheet should take a few days to a few weeks depending on how complex the transaction is and how organized you and the lender are. There should be language in the term sheet documenting that the GFD is refundable if the loan is declined by the lender. However, if you shop the bank after you sign the term sheet and send in the GFD, you can expect to NOT get it back. Some borrowers resist this and are surprised by it, but the time to shop is in the beginning of the process not now. Also, if the lender orders third party reports, prior to the approval and the loan is declined, you’re not going to get all of the deposit back as the third party report companies get paid regardless if the loan closes. If there isn’t language about the GFD being refundable, be very careful about moving forward with the lender or broker! You’re likely dealing with a con artist. Perhaps, if you know them well or if you were referred to them by someone you trust than it maybe ok, but normally this is a bad sign.
- Approval – Once you signed the term sheet and sent in the Good Faith Deposit, you are now on your way to the most important part of the commercial mortgage loan process – getting the loan approved, ie getting a commitment. The commitment letter is a legal document that states that the bank will fund your loan with conditions, such as the appraisal report verifying the value, the environmental reports verifying there’s no issues and that title is clean. The process now intensifies as underwriters really begin their work and heavily scrutinize the documents you’ve already provided. As they are going through the package expect to receive several questions and to have you provided other supporting documentation. Once you have addressed all of there questions, you should have your decision – approved or not, and if you still have the same terms as originally quoted. This step can take as quick as a few days to months depending mostly on how organized you and the bank are and how willing you are to answer question and provide requested docs. Don’t be surprised if they come back and ask for more money at this point, as the good faith deposit provided may not be enough to cover all the third party report costs.Some smaller banks won’t want to put the commitment in writing as it’s burdensome to create the document and creates lender liability for them. You might just get a simple email or phone call giving you the good news. This is not necessarily a negative, especially if you have a good relationship with them. But most larger lenders do issue commitments in writing. Once you’ve received the commitment you’ve completed the most important and difficult part of the commercial mortgage process.
- Third Party Reports – After the loan is approved, all of the third party reports are now normally ordered, such as appraisals, environmental reports and building inspection reports. The borrower as well as the banks job is largely done and you simply wait for these reports to be completed. This step normally takes less than a month. Most appraisals take around 3 weeks to complete, the rest of the reports should take a week or two.
- Closing – Assuming all of the third party reports came up with the hoped for results, you’re now ready to complete the process and close the loan. The lender will draw documents and the closing agents will be engaged. See full commercial loan closing costs report here. The closing is pretty anti climatic as you just sign documents, none of which are normally negotiable. You’re done!
In a nut shell this represents the entire commercial loan process for virtually all banks and lenders.