What Should A Commercial Borrower Do If The Bank Declines Their Commercial Mortgage Application?

By | January 9, 2017

Many commercial projects are too entrepreneurial for mainstream commercial lenders. In these situations it is not unusual for commercial borrowers to be declined for a commercial mortgage loan by a traditional bank. Commercial borrowers are likely to be confused when they are turned down and will be unsure as to why it happened and what to do next. This article highlights the five main reasons that banks decline commercial mortgage loan applications. For each of the reasons that a bank might decline a commercial real estate loan, a strategy is provided for converting the declined loan into an approved commercial mortgage. An appropriate (but lengthy) subtitle for the article is How to Convert Declined Commercial Mortgage Loans into Approved Loans: The Top 5 Reasons that Banks Decline Commercial Mortgage Loan Applications and The Top 5 Strategies for Converting A Declined Loan into an Approved Commercial Mortgage”.

Reason # 1:
Loan underwriters find something on a tax return that disqualifies a borrower under the bank’s lending guidelines. This “something” will frequently be insufficient net income, but when loan underwriters look at tax returns, there are many other possibilities which produce a similar result.

Strategy # 1:
Business loan borrowers will NEVER have Reason Number 1 to worry about if they are applying for a “Stated Income” commercial real estate loan. Very few traditional banks use Stated Income (no tax returns, no income verification) for a commercial mortgage. Commercial borrowers should seek out lenders using Stated Income Commercial Loans and “Limited Documentation Requirements”. This strategy will not work for all commercial mortgages since there is a maximum loan amount of $2 million for most Stated Income Commercial Mortgage Programs.

Reason # 2:
A bank’s loan officer or loan underwriter is not satisfied that the business plan provided by the commercial borrower supports the requested loan.

Strategy # 2:
Most commercial borrowers will benefit directly from dealing with a commercial lender that does not require a business plan due to the following major benefits:

(1) Reduce commercial mortgage costs by thousands of dollars. A common range for an average business plan (prepared to typical bank specifications) would be $5,000 to $10,000.

(2) Reduce mortgage closing time by several months. Business plans can be prepared before or after applying for a loan, but either way the net extra time required will probably be 1-2 months or more.

(3) If the lender does not require a business plan, there is one less item standing between the commercial borrower and their approved loan.

Reason # 3:
The bank will not provide a business loan without adequate collateral, usually in the form of a lien on personal assets such as the commercial borrower’s home.

Strategy # 3:
Commercial mortgage borrowers should seek out lenders that do not “cross collateralize” assets as a condition for obtaining a business loan. This will provide greater flexibility for the commercial borrower and avoid unnecessary (and unwise) connections between personal and business assets.

Reason # 4:
The bank does not generally make business loans for the type of business involved or imposes special requirements that make the loan impractical for the commercial borrower. Fewer and fewer banks are making loans to bar/restaurant properties. Similarly, auto service businesses are frequently given unnecessary (and expensive) environmental reporting requirements. There are many “special purpose” properties such as nursing homes, assisted living facilities, churches, RV parks, marinas, golf courses, funeral homes, bed and breakfast, day care centers, and car washes that most traditional banks will not include in their business lending portfolio.

Strategy # 4:
For most business borrowers that can get approved at a traditional bank, there are better options available elsewhere. And “better options” are clearly available ONLY elsewhere when the bank won’t make the business loan in the first place! There are very capable commercial lenders that are interested in unique or special purpose properties.

Reason # 5:
When a business is refinancing their current commercial mortgage and wants to get a significant amount of cash out for various uses, it is not unusual for the bank to limit the amount of cash to amounts as small as $100,000. Even though the bank might make the loan, if they won’t provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.

Strategy # 5:
As mentioned in Strategy Number 4, there are better options available elsewhere! The commercial borrower’s mission (and it is not impossible at all) is to use a commercial real estate lender that will allow them to get much larger amounts of unrestricted cash out of a commercial refinancing, i.e. more cash out and no restrictions on what they do with it.