I typically try to avoid anything close to a rant, but I had an extremely frustrating day that was due entirely to one of my clients not reading their loan documents. They had purchased this property and signed these loan docs quite a few years before I met them. It seems that they didn't read them when the signed them, and they definitely hadn't read them anytime since. When you are searching for a loan, especially a commercial mortgage, it is imperative to read your loan docs! I know that many investors are only interested in the interest rate, but there are several other mortgage clauses that can greatly impact the profitability of your investment over the long term. Here are just a few things to think about the next time you're shopping for a loan:
Interest rate: This one is usually obvious, but maybe not. Is your rate fixed or floating? If it floats, what index is used? Is there a cap? What is the default rate? Read your loan docs?
Amortization: The rate at which your mortgage amortizes can effect your cash flow as much, if not more, as your interest rate. Does the amortization change over the course of your loan? Read your loan docs!
Leases: Does the lender have the right to approve leases? Are they allowed to charge you a fee for this? Do they have to be 'reasonable' when reviewing leases? How long are they allowed to take to respond to a lease approval request? Read your loan docs!
Insurance Loss: Are you required to inform your lender of a casualty at the property? Does the lender need to be named as an additional insured? Do you have to pay for repairs up front and be reimbursed out of escrow? What is the process for disbursing your insurance proceeds? Read your loan docs!
Prepayment: Are you allowed to pay off the loan whenever you want, or are you limited to specific payment dates? Do you have to pay a premium or penalty to payoff early? How is the penalty calculated? Are you required to defease? Read your loan docs!
Escrows: Are you required to escrow for taxes and insurance? Can the lender require additional escrow funds for any reason? Is the lender requiring that you fund a reserve? What is the process to get a reserve disbursement? How long does the lender have to respond to an escrow disbursement request? Does the lender have to be 'reasonable' when making decisions regarding your escrow funds? Are you paid interest on your escrows? Does the lender need to pay you the same amount of interest as they are being paid? Read your loan docs!
Reporting: How often do you have to provide financial? How often can the lender request additional documents? Who pays for audits? How often can the lender request audited financials? Read your loan docs!
Any one of these clauses can create headaches and can turn a great investment into a loser. My day was ruined due to the wording of just one of these clauses, but what is worse is that my clients are losing money, and wasting their time because they hadn't read their loan docs all those years ago. In the future I'm sure they'll read their docs and hopefully have an attorney review them as well. I know I'll also be reading the docs on any loans they get with deals that I'm involved in. Is there a specific mortgage clause that you pay particular attention to? If so please feel free to comment below.