A borrower goes to a bank lender with a fixed-rate loan request for a commercial property with a fully permitted building and a loan-to-value (LTV) rate of 50 percent. The borrower has all of the documentation ready to go (including the purchase-and-sale agreement and an appraisal). It would seem that this request should be a straight-forward, profitable deal. But then, the bank lender starts asking questions about the purchase price versus the property value and discovers that the purchase price is less than the current property value such that the 50 percent LTV loan would actually cover the entire purchase of the property as well as providing capital to pay for renovations to the property. This is the point at which most bank and institutional lenders will reject the request because they have to lend on the lower of appraisal value or purchase price. Also, it can be difficult to get a bank-financed commercial mortgage without having any skin in the game.

What should this borrower do? Such rejections can be avoided if you research lenders and figure out their lending regulations, their typical loan terms, and the types of loans they finance. In this example, a hard money lender could be the answer to the borrower’s problem because hard money lenders are often willing to base the LTV on the current or potential property value rather than the purchase price. Knowing whether the loan you’re applying for is even possible to receive before you submit the loan request will save you (and potential lenders) a lot of time. And, as they say, time is money.

Here are some questions to ask a new lender before you even submit your loan request:

1. What is the typical LTV rate for which you provide capital?
2. Do you have any geographical lending restrictions?
3. Do you have a minimum cash equity require for your loans?
4. Do you have a debt-service coverage requirement for your loans?
5. What is the typical timeframe for your loan closings?

Having the answers to these questions can help you to match your loan request with the lender most likely to approve it. When you have an undervalued property, a hard money loan can often be the better choice as it allows you to purchase and upgrade the property to a point at which it can be qualify for and be refinanced with a conventional mortgage from a bank lender.