Navigating the Underwriting Process between Quote and ClosingPaul Winterowd
Preparing for Underwriting So Your Deal Gets Done
Securing a multifamily loan is like training for a marathon. By the time an investor decides on a loan, they may feel like they’ve reached the finish line, but really it’s just the halfway point.
Like training for a marathon, proper preparation leads to an accomplished goal. Investors who better understand the underwriting process will be more equipped to successfully secure funding for their next multifamily investment property.
Although it is easy to lump underwriting into the backstage process of completing loan approval, there are really three waves to the underwriting process. The first phase is to gather and submit all the required documentation. Then, there is a lull while all the information is being carefully processed and reviewed. The last wave is a flurry of answering final questions and tying up loose ends before closing.
Borrowers will be highly involved in a back and forth process when it comes to scheduling, providing documentation, and responding to questions. The more responsive a borrower is, the more efficient procedures will be. Don’t be overwhelmed by the process—as you learn to prepare for and navigate the underwriting process, you’ll be one step closer to closing on your next multifamily investment property.
More Efficient Underwriting Starts With You
A multifamily loan typically takes six to eight weeks from start to finish. Even before borrowers make a decision about a lender and loan package, they have gone through the lengthy process of exploring various loan options.
Once a borrower decides on a loan, they begin the application with a deposit showing their commitment to the loan. This begins the formal underwriting process. Formal underwriting includes the appraisal, environmental testing, site visits, unit inspections, completed financial analysis, legal review, title work, a review of property insurance and taxes, organization structure review, and anything else an underwriter could want to know.
There are other ways to make this process faster and more efficient. You can start by simply updating the following documents on a regular basis. If you don’t have them all on hand, you can create the forms you need by using a simple template, easily found through a quick internet search or by asking your broker. All loan sponsors and guarantors should have the following ready and available:
Make sure your property manager keeps and can readily provide you with a current rent roll, a 12-month profit and loss statement for the property, and the previous three years’ annual profit and loss statements.
- Organizational and legal documents – Also be prepared to provide an articles of organization document, operating agreement, and EIN number.
- Tax returns – Be sure you have tax returns for the previous three years’ personal income and any businesses you have ownership in.
You may not have total control over the underwriting process, but you do have control over how you present the necessary documents that will determine your strength as a borrower. It’s important you do the necessary work to get your ducks in a row at the beginning of this process — not only does it help you move toward closing faster, but it is also your chance to present all the supporting information in a way that highlights you and your investing resume.
Other Potential Speed-bumps on the Road to Funding
Once you compile the documents necessary and hand them over to the underwriters from your lending institution, your loan will pass through a few other hands. Virtually all commercial real estate loans must pass through a loan committee as part of the underwriting approval process. How the committee is structured varies from lender to lender and program to program.
Generally, a borrower does not have access to the loan committee that ultimately decides whether or not the loan will be approved. As a potential investor, do everything in your power to make sure the information you have provided to the committee is accurate, strong, and tells the whole story of you and your investing background.
It is important to keep in mind that the loan committee has the power to kill a deal. A responsible mortgage broker will identify any information of concern in your background and documentation. Although you can’t change the facts about yourself or the property you want to buy, you can be realistic about potential concerns to ensure your expectations are in check.
After your loan is approved by the loan committee and other underwriting processes, the deal will enter title and escrow. Most brokers and lenders have worked with several title and escrow companies. It makes the transaction smoother if the lender and title company are familiar with each other.
A title company researches the property’s history and confirms that the title has passed through the proper channels. A title company verifies the legality of a property’s ownership and they make sure the ownership is passed properly. Most often, a title company will also serve as the escrow officer and closing agent to enable a seamless transition to a closed transaction.
Escrow is a third-party that holds funds until the dotted line is signed. This financially protects both parties. The involvement of an escrow party varies from state to state and is slightly different for large commercial real estate deals and residential real estate.
It is best to rely on your broker’s or lender’s recommendations for whom to work with during the title and escrow phase of the deal. They will have someone they trust and know will execute the deal timely and effectively.
Closing documents and coordination can be messy and complicated. A deal is not over until it’s over. Choose a broker or lending institution that will put you in the best hands for this final wave of the buying process. If you are prepared, organized, and responsive, you will navigate the underwriting and closing processes smoothly and efficiently.