Your Loan Application
Warning: This is the most important document in your loan transaction.missing
- Loan Terms: The financial loan terms, including principal amount, interest rate, payment date(s), grace period, late charges and the default interest rate.
- Rate Lock: The borrower should negotiate a "rate lock," the lender's promise that the interest rate shall be fixed, provided the loan funds by a specified date.
- Costs and Expenses: All of the costs and expenses the borrower is expected to pay in connection with the loan-approval process should be set forth in the loan application. Depending upon the situation, the borrower may be able to negotiate a cap on the amount of some or all fees and expenses.
- Security/Recourse: In most cases, the facility itself will secure the loan, either by way of mortgage or deed trust. Additionally, the lender may require the owner to assume personal liability for the loan. It is a crucial aspect of the loan negotiations. In many cases, it may be possible to negotiate the personal liability of the business owner for the loan, limiting such recourse to specific situations.
- Loan Assumability/Transfer of Interests: Whether the loan is assumable, or whether the owner is permitted to make certain transfers (i.e., to family members or other investors) should be specifically addressed in the loan application.
- Prepayment Issues: If the lender intends to securitize the loan--and in certain other cases--he may require a prepayment penalty in the event that the loan is paid prior to maturity. In such cases, careful attention must be paid in the loan application as to the terms of the prepayment penalty clause. Consideration must be given to prepayment, not only in the event of a sale or transfer of the facility, but in the event of a casualty that results in the payment of the insurance proceeds.
- Loan-to-Value and Cash-Flow Verification: Inevitably, your loan will be subject to the lender's verification of the loan-to-value ratio of your property and the prospective loan, as well as verification that your facility satisfies the lender's debt-service coverage ratio. The better these members are, the better able you will be to negotiate more favorable loan terms. It is essential that you and your counsel review and understand the formulas used by the lender to determine your facility's loan-to-value ratio and cash flow.
- Insurance and Impound: The lender's requirements for coverage and impounds for taxes and insurance should be spelled out in the loan application. Often times, this aspect of the loan is overlooked, and the borrower receives several nasty surprises in the loan documentation submitted by the lender.
- Supporting Documentation: In order to hold the lender to its obligations under the loan application, particularly in the event that the negotiated and locked interest rate does not change, the borrower should insist that the lender include, as part of the loan application, a detailed list of the documents and conditions that must be satisfied before the lender will issue its loan commitment. This will prevent the lender from later making necessary and unjustified demands for additional documents and/or conditions, as well as from attempting to change the loan terms or simply refusing to fund the loan.