What Do I Need To Ask My Commercial Lender?

Before you sign on the dotted line for a commercial real estate loan, whether you are using it for renovations, refinancing or a new purchase, there are some questions that you are going to want to ask your commercial lender to prevent future headaches.

Even if you have done a few real estate investments and have a good grasp of what is going to happen during the loan process of a property purchase, it never hurts to revisit questions that you are going to need answers to in order to properly prepare for your real estate venture. And if you have never experience the thrilling chaos of property investment, then you will definitely need a starting point to prevent being overwhelmed by all of the information. In either case, open communication with your commercial lender will put your fears at ease and help you to properly prepare for your future.

One of the biggest mistakes that many borrowers make is not understanding prepayment. The answer to this question varies greatly depending on the lender, but it is information that you need to have to build into your plan. So ask how it works for you lender. Do they allow prepayment? If so, are there any penalties for doing so? Are there any special conditions that need to be met before the loan is eligible for prepayment? Your commercial lender should will easily be able to lay out the conditions and requirements for you, but it is much better to know these before the loan is finalized rather than being surprised.

Along those same lines, you should also ask if you, as the borrower, can defease the loan. Essentially this means that the borrower can set aside enough capital to cover the entire cost of the loan before the payment terms have come to pass. The borrower is replacing collateral with another form of security. For accounting purposes, this means that the loan is wiped off the books. As a borrower, this makes the loan null and void. Check with your commercial lender to see if this is even a possibility. While this is not a common approach, it does happen often enough that lenders will have provisions in the contract to cover such an eventuality. You should know what those are to build into your plan.

Borrowers should also know what type of guarantees, or warranties, that they are going to have to provide for the loan. This is a safeguard that many lenders build in to protect their investment. For loans that are only backed by the security of the property, the borrower will not have any warranty wrapped up in the loan, but this is not common. What is far more likely is that some of the personal assets of the borrower will be used as collateral. If the loan, and the property investment, fall apart, these assets will be seized by the lender. Obviously, this is a critical piece for a borrower to know before jumping into an investment.

But won’t asking all of these questions bother my commercial lender?

It shouldn’t. Lenders appreciate borrowers who are educated and want to make sure that the investment moves forward without any problems. If your commercial lender seems to have a problem with you asking questions, you might want to question their motives and check around. After all, you are going to be tied to them with your loan for quite a bit of money and a good length of time.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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