If you’re a mortgage broker, a small business owner, or a commercial property investor who’s new to small-balance commercial mortgages, the underwriting process can seem difficult to understand.
At APEX, we’re committed to helping our brokers and borrowers succeed, and giving you the knowledge to do so is a high priority. So, we sat down with our Underwriting Manager, Melissa, to get answers to some common questions we hear from broker and borrowers about underwriting small-balance commercial mortgages.
Q: Tell us about your role at APEX.
Melissa: I am the Underwriting Manager, which means I lead that department. I help the sales team review deals up front. Once those deals are accepted, they come over to underwriting, and I will then distribute them to my team. I will review each file again for conditional approval, final approval, and help with questions along the way. I also assist the processing team with any challenges that arise towards closing on our files.
Q: For brokers and borrowers who are unfamiliar with APEX, can you walk us through the process that you go through when a new deal comes in?
Melissa: First, we review the file so that a term sheet can be sent. Once that comes back signed and the good faith fee is processed, the deal is transferred to the underwriting team. From there, we review the file – the application, the credit, rent rolls – and do our analysis. Then, the underwriter responsible for the deal will send a write-up with their recommendation for the file, which I then approve. Then, they send out the conditional approval. Once we get all the requested stips back, we schedule and conduct a twenty- to thirty-minute phone interview with the borrower. After that’s completed and they send the file back to me, I review everything they’ve typed up, and then I final approve it so that it can be transferred to the processing team.
Q: From an underwriting perspective, what do you think is the most important information that a broker or borrower can send us early in the process?
Melissa: I think the biggest thing that we often don’t understand when a deal is submitted initially is the use of proceeds and what the benefit is to the borrower. I think making sure that that is clear up front can certainly help an underwriter determine what the borrower’s needs are and why they’re borrowing money. I think a lot of brokers will give us a very generic use of funds, like “The borrower wants working capital.” But then, after we talk to the borrower, we sometimes find out that there’s more to it. For example, they might want some money for working capital, but that the real driving force of the deal is that they need to pay off a ballooning mortgage on another property. Or maybe they needed money to fix up another property so that it can start generating more income. I think the more detail we get when it comes to use of funds, the more it helps an underwriter to do a thorough job.
Q: In your opinion, what are some of the most common mistakes brokers make when they submit a deal, and how can they avoid those mistakes?
Melissa: Again, I think not sending us a detailed use of funds is a mistake many brokers make. They don’t want to give us too much information, so they try to give a generalized blanket statement about why their borrower wants the money rather than the detail we’re looking for as underwriters. I think another common mistake is not filling out the application completely, particularly the schedule of real estate section. That information helps us to understand how much real estate a borrower owns and gives us an idea of whether they can tap into additional equity if they get into some trouble. Rather than hold back that information, it’s much better to give us a complete picture of what they borrower is working with.
Q: What is one piece of advice that you’d give to small business owners or commercial property investors seeking a small-balance commercial mortgage?
Melissa: It’s very important for them to explain what they need the money for and why, so again, that use of funds is crucial. We need to be able to distinguish between what a borrower needs and what a borrower wants. Our rates aren’t bank rates, so it’s important for us to make sure that a deal actually makes sense for us and for the borrower. So, I’d say they make sure that they prioritize what their needs are and to have a very clear idea of that before they apply.
Q: What would you say is APEX’s biggest strength as a small-balance commercial lender?
Melissa: One of our strengths is that we talk to the borrower directly. We get to know them. We’re hearing directly from the borrower about what they need, what they want, and how this is going to help them. It helps us to get a comfort level. Instead of just looking at the documents either they or their brokers send in, we’re talking to them, and we can ask more questions and get more information up front than other lenders can.
Q: So, would you say we take a common-sense approach to underwriting?
Melissa: Yes. We understand self-employed borrowers who don’t always report all their income. So, for example, you might see a borrower who has a car payment and a mortgage on their home. Let’s say, they’re reporting that they only make $20,000 a year, but their credit report shows they’ve never missed a payment. Common sense would tell you that there’s additional income, it’s a cash business, there’s probably more money there than they’re reporting.