Refinancing Your Mortgage: A Primer


Refinancing an underlying mortgage is a complex process, one that requires thorough planning and careful execution. While I have completed transactions in as little as three days, most take around two months. Assembling all the necessary information, deciding on the amount, term and amortization schedule, and sorting through the various lenders and loan offers will consume at least half of that time. Reviewing the commitment and closing your new loan take up the balance.

Virtually every lender has a formal loan-approval procedure that starts with its own set of forms that comprise the application. When a signed application is received, the process passes through underwriting, and culminates in the issuance of a commitment. These help organize all of the information that the lender needs to determine whether the proposed loan makes economic sense. None of the information requested is especially complex, although you might have to call a few of the shareholders who have lived in the building for a long time and/or several of your building's advisors to get some of it.

Some forms require no more than a date and the signature of one of the co-op corporation's officers. Typically, these are authorization forms that give the lender permission to verify certain information. For example:

• A loan verification form asks your existing lender for information regarding your co-op's current loan (lender, address, loan number, contact person, phone number, etc.) and your payment history. You should be ready to explain any late payments or other credit issues.

Deposit verification forms allow the new lender to confirm that the checking, savings, money market, and investment account balances that the co-op reported are accurate.

• An environmental questionnaire helps them determine whether the co-op's property presents any environmental risks. While board members and managing agents may not be able to answer every question on such a form, they should be as complete and honest as possible. If the co-op's questionnaire provides enough information, the new lender may waive any further environmental investigation (thus saving the co-op substantial time and expense). If not, the lender most likely will order a follow-up inspection by a licensed environmental engineer to evaluate potential hazards.

Going Over Underwriting

The next step in the loan approval process is underwriting. During this phase, the loan officer and other lender personnel evaluate all of the information that the co-op supplied on its application and various accompanying forms, as well as any other facts provided. Annual accounting statements paint a picture of the co-op's financial condition and indicate whether the co-op can carry the new debt and ultimately pay it back.

Additional supporting information will come from a credit report, an appraisal, an engineering inspection and an environmental assessment that the lender might order from third parties. The co-op's credit report is much like what would be requested for an individual. It lists the co-op's outstanding loans, liens, judgments, and other obligations as well as its corresponding payment histories. All lenders want to be sure that potential borrowers pay their bills on time.

An appraisal (if required) will determine three hypothetical values for your co-op:

Replacement value (the cost to rebuild the building today on the same or similar lot)

Sale value (based on recent sales of "comparable" properties)

Investment value (based on the income stream your building would produce if it were a rental).

Lenders consider all three values, but they give the most weight to your co-op's value as a rental because, if your co-op doesn't make its payments and the lender must foreclose, your co-op would revert to rental status. The appraisal forms the basis of the lender's loan-to-value ratio (LTV) calculation. Each lender has a maximum LTV limit, usually around 65 percent.

Many lenders also hire a professional engineer to thoroughly inspect the property to ensure it needs no significant repairs. Serious defects and Building Department violations must usually be corrected before or very soon after the new loan closes. Some lenders even escrow (hold back at closing) funds until such repairs are completed. In addition, the lender may insist that the co-op establish a special replacement reserve to pay for major repairs the engineer thinks may be needed during the term of the new loan.

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