One of the major differences between institutional lenders and private lenders is the timing involved in the commercial loan underwriting process. Traditional mortgage lenders have tight criteria and strict procedures to follow in the commercial real estate lending process, giving rise to one of private money lenders biggest advantages – speed and flexibility.

Institutional Lenders Process

1. Collecting and Presenting Documentation – When applying to a bank for a commercial mortgage be prepared to provide the property’s income statements, balance sheets, statements of cash flow, and tax return information for the past 3 to 5 years. Other documents that will be requested are rent rolls, leases with financial statements from the tenants, borrower or guarantor’s personal financial documents, and all appropriate corporate documents. (Can take multiple weeks)
2. Underwriting Begins – Once all the necessary documents are collected, underwriters scrutinize applicants to evaluate the risk and the ability to repay the loan. (2-3 weeks)
3. Appraisals and Engineering Reports – Independent appraisals are done, environmental information is gathered, and engineers inspect the building for any major structural concerns. (4-8 weeks)
4. Commitment Letter Delivered – If the lender is interested, they typically deliver a written commitment letter. The commitment letter signifies intent to fund the loan, but normally contains multiple contingencies and is not binding. (1 to 3 weeks)
5. Loan Committee Evaluation – Approved loans are sent to the loan committee for evaluation. The loan committee has the authority to veto any loan based on a number of criteria, i.e. overall market forecast, overall loan portfolio balance, funding capacity, re-evaluation of risk factors, etc. (Up to 4 weeks)
6. Closing the Loan – Final paperwork is signed and the deal is closed.

The entire commercial real estate lending process is rarely completed in less than 3 months, and, more often than not, takes much longer. In the event that the final loan committee vetoes the loan, the borrower has to start all over after having wasted months of valuable time.  The prudent borrower will make sure to account for all the above mentioned variables when purchasing or refinancing real estate.

Private Money Lenders Process

1. Collecting and Presenting Documentation – Hard money lenders procedure is quite streamlined in comparison.  An initial interview will discuss where the property is, what the borrower wants to accomplish, the size of the loan, how the funds will be used, and the personal financial situation of the borrower/guarantor.   For more complex loans additional information may be required. A private capital lender will typically try to get all this information at the time of first contact with the prospective borrower. Our advise is to be prepared, both for direct lenders and institutional mortgage lenders.
2. Terms Sheet and Commitment Letter – After getting a feel for the mortgage request a private capital lender can provide a term sheet outlining the basic terms of a loan within 24 to 48 hours from initial contact. If the borrower approves the terms a more detail commitment letter should be provided by the lender and signed and approved by the borrower. (About 1 week)
3. Underwriting and Final Approval – Upon receiving a signed commitment letter, private money lenders start their due diligence, which includes appraisals, engineering reports, and final loan review. Underwriting can be completed much faster because of the efficiencies in dealing directly with the actual provider of the funds instead of going through a long process of working your way up the corporate ladder.   (2 to 3 weeks)
4. Closing the Loan – Final paperwork is signed and the deal is closed. (About 1 month total)

In addition to the obvious advantage of getting a loan closed in 30 days instead of in 90 to 120 days, there is another. Knowing whether a loan is approved or not within a matter of two weeks or less, rather than the 90 period of bank or institutional lender, saves both time and resources.

At Montegra Capital Resources, the person you speak to at your initial discussion is the same person who will evaluate, approve, and close your mortgage. We know our market, and what we can or cannot do for you.  By cutting out unnecessary red tape and loan committees, Montegra provides real estate professional the capital they need when they need it.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.