One of the many benefits of CMBS conduit loans is the ability to get loans approved in which the owner of the property has derogatory credit history. Examples of prior credit issues that could negatively impact a loan approval decision are loan defaults and modifications, personal or property bankruptcies, foreclosures, crime convictions and lawsuits. Often other commercial lenders will not consider a loan in which the owner has disclosed any of these items.
But in CMBS conduit lending, the majority of the credit decision for loan approval is based on the income-producing ability of the real estate asset. Derogatory credit information related to the owner can often be structured around to get the loan approved.
However, an issue arises when the owner believes the lender will not find out about the derogatory history and the owner chooses not to disclose the matter. In almost every instance, the matter is discovered and the loan is immediately declined.
The right way for an owner to approach derogatory credit matters is to provide full disclosure up front. Credit searches today are very detailed. All issues will turn up in searches. The process starts at the beginning of a transaction with the owner completing a 25-question certification asking whether the owner has ever had loan defaults and modifications, personal or property bankruptcies, foreclosures, crime convictions and/or lawsuits. It is imperative that the questions be answered truthfully by the owner. The CMBS conduit lender then gives the owner an opportunity to provide a detailed explanation of the matter(s). A thorough and complete explanation, often drafted by an attorney, with supporting documentation frequently results in a loan approval.
So please tell the truth to avoid a lot of wasted time and money if you have credit issues on a CMBS conduit loan.