When lenders conduct a borrower assessment, they typically base their evaluation on some variation of the “5 Cs” – Character, Capacity, Capital, Collateral, and Conditions.
But why should lenders have all the fun? With so many different types of lenders in the commercial mortgage market, it’s just as important for you to develop an evaluation model of your own. If you know which questions to ask, you can get a clear picture of a lender’s ability to fund your loan and meet your specific needs.
Here are 5 Cs you can add to your due diligence process when shopping your funding request.
Credibility speaks to the lender’s history of funding loans. Are they experienced or are they new to the marketplace? What is their reputation? Are they well-capitalized to fund their loans?
These can be difficult questions to ask, but the answers you receive are vital. You want to know if a lender is actually funding deals right now and if so, what kind of experience they’re creating for borrowers like you.
2. Certainty of execution
Does this lender do what they say they’re going to do? And can you count on them to get the job done in your timeframe?
Unfortunately, a number of lenders in the market today will approve a loan at first and change the terms during the underwriting stage. The borrower is left to either accept the new terms or back out of the transaction. This process, known as “re-trading” can make life very difficult for borrowers with a pressing need for financing.
Instead of asking a lender how fast they approve and close loans, ask them what percentage of their transactions are funded with the terms originally agreed upon with their borrowers.
3. Consistency of underwriting
Does the lender have well-defined guidelines that are transparent and consistently applied? Or does it seem as though they’re making their process up as they go?
This type of information may not show up on the lender’s website, but you can talk to one of the lender’s representatives and get a good idea of their process.
If you’re looking for a place to start, try to learn how the lender treats property appraisals. Do they order the appraisal early on in the process, or do they wait until a portion of the underwriting has already taken place? Will they accept outside appraisals, or do they only work with a group of approved appraisers? As you do your research, look for consistency and a sense of urgency.
The underwriting stage can be confusing, especially if you’re new to the world of commercial mortgages. So be sure to ask about the specific role each member of the lender’s team plays during the underwriting stage and find out who can best assist you when you have questions.
4. Customer experience
Does the lender create a positive experience for borrowers? You can check for testimonials on their website, but be sure to also search online for additional feedback.
The following aspects of a customer’s commercial mortgage experience seem to be the best indicators of a lender’s quality:
- Did the lender fund the deal as agreed upon or did they change the terms late in the process?
- Did the lender communicate thoroughly during each stage of the transaction?
- Did the lender do everything in their power to provide funding as quickly as possible?
Securing a commercial mortgage can be a stressful undertaking – don’t create any additional difficulty for yourself by working with a lender that creates negative experiences for their clients.
The more harmony that exists within the lender’s organization, the more likely it will be for borrowers to have a smooth experience. For this to occur, all departments within the organization need to have the same mindset and goals.
It may be very difficult to get a sense of a lender’s continuity before transacting, but you can identify clues that indicate the potential for trouble:
- Does the lender have a loan committee? These groups can create disagreements within the organization and delay the transaction process
- Is the lender a subsidiary? If the parent company is a traditional bank, the lender may have less flexibility then they advertise
- Does the lender give you one point of contact? Or will you receive mixed messages from a number of representatives?
There is only so much you can learn about an organization’s inner workings before transacting with them, but any information you can glean beforehand can help you avoid disjointed or inconsistent lenders.
It can be difficult to compare lenders based purely on their messaging and program descriptions. But if you evaluate prospective partners against the 5 Cs, you will quickly discover which lender best aligns with your specific needs.