Why Banks turn down 65% of Commercial Loans?

By
Mortgage and Lending with Star Quest Commercial Capital, LLC

The simple reason 65% of commercial loans are turned down really comes from a conversation I had with a local bank officer. When I went to my local bank, the bank officer asked me what type of business account I wanted to open. I told her, I wanted to open a commercial mortgage business account. She said, oh, you're the competition. I said, not really because all my partner lenders were non-depository, so there was no competition.

She said she was glad to hear that because she hadn't closed a commercial loan in 3 months. I asked her, "why not", she said, that her bank rules were so stringent that she had to turn down 65% of the borrowers that apply for commercial loans. She also said, that she wished her bank would lighten up.  She really felt bad for most of her applicants because they were depositors.

That reminded me of one of my commercial finance teachers, who told me that local banks will not lend money on non-performing assets. They can't loan money on vacant land or a vacant building, even though there's tremendous value in it. Well, that told me right there that the small guy coming in with a business plan in hand was in trouble before he/she got through the door. "Performing assets" that was the deal breaker. If you can't show the bank that your collateral is a performing asset, you will be in that  65%, or you will have to put up such a large interest reserve, you might as well buy the property out right.

Local banks are portfolio lenders that create collateralized mortgage obligations for it's own portfolio. These banks take deposits from the public and reinvest those deposits into mortgage loans. This limits the amount of loans they can service which also means they will cherry pick the best borrowers. Because of the stringent borrower's requirements such as credit and interest reserves only 35% of borrowers will ever get financed through local banks.

Unfortunately, most borrowers are not educated enough to know the right type of lender for their particular loan scenario. They will choose a local bank as their first stop every time. Borrowers will often get frustrated and either accept the bank turn down, or look for other financing options.

That's where a true Commercial Mortgage Specialist comes in. A Commercial Mortgage Specialist will look at the scenario, and know right off, that a land or vacant building will not pass muster with a local bank. They will know that the borrower will be better off with a hard money lender.  A Hard Money lender is a private company who is not regulated the way local banks are.  They charge a fee in lieu of a pre-payment penalty and make their money from charging higher interest rates.  Most investment borrowers will take a short term hard money loan, and get that property to performing status. They will then get a traditional bank loan with better rates and terms and pay off the hard money lender. These loans are short term, normally 6 months to a year.

I have come to learn as a Commercial Mortgage Specialist that there are lenders who specialize in every type of loan scenario. The key is knowing the lenders that can get the job done. I know the good ones and the bad. If you have a loan scenario that you need help on, please visit me at http://www.starquestcommercial.com or leave me a message. I love helping others with any commercial loan scenarios..

Comments (3)

Jimmy McCall
JimmyMcCall.com - Cunningham, TN
The Ex-Mortgage Consultant
Jerald,  This was some good information to read.  I wish I could cherry pick the best clients.  Heck, I just wish I had a walk in every once in a while.
Mar 26, 2008 09:01 AM
Jerald Tuck
Star Quest Commercial Capital, LLC - Richmond, VA
Thanks. I was really surprised to hear how so few commercial loans are approved through local banks. When I'm dealing with different lenders, I can always tell what lenders are FDIC, just by what they can't lend on.
Mar 26, 2008 12:00 PM
Jeff Rauth
Commercial Finance Advisors, Inc - Birmingham, MI

Jerald,  I call on a lot of banks and get some of their turn downs.  Its been a great way for me to source deals. 

By the way I would estimate that the current level of decline is more like 85% - 90% by the national banks like b of a, citi, ect,

Commercial loan broker store

 

Jul 02, 2008 01:12 AM