We recently received a commitment letter from a lender for a new underlying mortgage on our building, with an expiration date just five days after it was written! And, even worse, we didn’t actually receive it until two days after it was written. So, we had only three days to review it, discuss it with our attorney, and schedule a board meeting to vote on it. Since the lender took more than three months to give us a commitment, can’t they give us a little more time now? Why, all of a sudden, the big rush?
Having served as the president of my co-op’s board of directors, I can understand your frustration. Refinancing an underlying mortgage is the most important decision that a board will make during its tenure. It will have an impact on not only the monthly maintenance of every shareholder, but also on the market value of every apartment. Five days hardly seems enough time to review and vote on such an important issue, especially after waiting so long to get it. On the other hand, having been a banker for several years, I can understand things from the lender’s viewpoint as well. By the time a lender has issued a commitment letter, they have done quite a bit of work. They don’t want that effort to go down the drain because the borrower takes the commitment and shops it around town with other lenders. Instead, they assume that you’ve already done your comparison shopping and are ready to move forward. In the lender’s mind, five days is more than enough time for an organized and serious borrower to review, sign, and return a commitment.
So, who’s right? Both are.
One of the very first articles that I wrote for Habitat, “Six Steps to Success” (August 1991), listed six actions that every co-op board should take before looking for a new underlying mortgage. The sixth step was “Respond Promptly.” In other words, every board should organize itself and its professional advisers (managing agent, attorney, and accountant) to be able to respond very quickly to all lender requests.
Why? Because loan officers always have multiple loan requests on their desks. They will work on whichever ones have submitted all of the required information. If your application package is poorly organized, incomplete, or the loan officer has questions that go unanswered for more than a day or so, it might get put aside. Lenders are very busy, so the easier you can make their job, the faster you’ll get approved. The fact that your loan took more than three months to get approved tells me that (a) you have a problem or two that required more detailed analysis or (b) you did not submit a complete application package and/or (c) you did not respond promptly to the lender’s questions. Loan officers are paid to make loans, so the faster you give them everything they need, the faster you’ll get a commitment.
Once a commitment is issued, the loan officer is anxious to turn the file over to the lender’s attorney and move toward a closing. In their mind, the business terms have been discussed and agreed upon (i.e., the deal is done). Therefore, delays in accepting the commitment, or protracted negotiations over the terms cause the loan officer to wonder whether they should have issued it in the first place. That is not a favorable situation.
Moreover, in today’s highly volatile interest rate environment, moving quickly can save you thousands of dollars. Most lenders give borrowers a fairly wide window within which to lock the interest rate on their new loan. However, lenders rarely let borrowers lock their interest rate until they have accepted their commitment and put up a rate lock deposit. Nothing is more frustrating than not being able to lock your interest rate as the market moves up. Therefore, the sooner that you can be in a position to lock a rate and take advantage of market drops, the better off you’ll be. And to do that, you almost always have to have returned an accepted commitment.
But, you say, your attorney is away on vacation and two board members are out of town on business, so there is absolutely no way that you can return the commitment before they get back. Fine. Ask for an extension. Almost any lender will extend the deadline to accept and return your commitment. However, the length of that extension, as well as the willingness of the lender to continue to hold the interest rate spread, often will depend on your level of cooperation up until that point. This is when your organization and prompt responses throughout the loan approval process can pay big dividends.
Finally, never accept a commitment without talking to your attorney. Their valuable input is essential and can save you both money and headaches down the road. That said, you should make sure that your attorney has experience closing underlying mortgage loans. This is a somewhat specialized form of loan that not all attorneys thoroughly understand. That sometimes results in the attorney requesting changes to the commitment that the lender will not accept. If you or your attorney persist in such requests, your loan could get repriced or, worse, rejected. So, you might want to consider retaining one of the many attorneys who are very familiar with underlying mortgages, know most of the lenders, and can review your commitment and close your new loan quickly. They might cost a little more, but you’ll make that back tenfold in a better deal and a faster closing.