The processing of a commercial mortgage loan application involves a significant amount of paperwork. Often the amount of paperwork involved exceeds that of a residential mortgage loan by several fold. Therefore neither the lender nor the broker wants to waste a lot of time processing a deal that is not going to close.
It is therefore customary in commercial mortgage lending for the borrower or broker to initially submit to the lender a mini package in hopes that the lender will issue a loan proposal. (For instructions on how to prepare one of these mini packages, please see the training memo entitled “How to Prepare a Proposal Submission Package”.)
A loan proposal is not a commitment. A loan proposal is merely an expression of interest by a lender in making the loan and an estimation of the eventual terms. Final loan approval will be subject to many factors, including a satisfactory appraisal, approval of the borrowers’ financial statement and credit report, and a more detailed analysis of the property’s cash flow. Therefore a loan proposal is legally worthless.
In practice, however, a loan proposal is very encouraging. Once a loan proposal has been issued by a lender and accepted by the borrower, there is an excellent chance your deal is going to close on terms very close to those agreed upon.
Sometimes loan proposals are in writing; slightly more often they are verbal. If issued in writing, they are often called “good faith letters”, “conditional commitment letters”, or “term sheets”.
It is common for banks, S&L’s, life insurance companies and CMBS lenders to ask the borrower to post a non refundable good faith deposit as evidence of his interest in the loan.
Unless the lender is a household name, however, the broker should investigate the lender thoroughly before tendering the borrower’s deposit. Good faith deposit scams are rampant in the industry. As a result, it is illegal for a mortgage broker in California to collect a good faith deposit.