Pre-Qualification vs. Pre-Approval

Pre-Qualification is a term broadly used within the Bed & Breakfast Industry to describe a process whereby a lender underwrites a borrower’s application and verifies their personal qualifications to provide the buyers, realtors and sellers a preliminary assessment on the viability of the borrower, relative to the financing options which might be available based on a combination of the buyers qualifications and current  market conditions and available loan programs.   The pre-qualification process should be conducted early on so that the borrowers expectations can be well managed and their energies focused on properties that fit their qualifications and overall investment objectives.

Inn Specialist Realtors and sellers of hospitality properties appreciate working with a buyer who has taken the time to understand the property characteristics that best fit their qualifications and objectives.    The checklist of items need to pre-qualiy are:

1. Commercial Loan Application
2. Verifiable Proof of Assets to be applied to down payment and reserves i.e
   Checking, Savings and Investment Statements, 401k/IRA Statements, three (3) years borrower’s personal tax returns
3. Resumes for all principals
4. Borrower’s Financial Statement/s
5. Borrower’s Credit Report/s
6. Proof of Identity - Passport or Driver License (Both Sides)

Commercial real estate financing’s are generally presumed to be serviced by the income from commercial property i.e. Debt Service Coverage Ratio (DSCR) and not by income from the individual.   Aspiring Innkeepers who will maintain income independent of or in addition to the net income from the business,  may have the luxury to qualify for financing that relies on a total Debt to Income (DTI) approach to underwriting rather than the aforementioned DSCR.

A large percentage of all inns are operated by one partner who runs the inn and another or others who will maintain his or her own careers. Innkeepers with smaller inns use this additional income to enhance their financial picture.   The Aspiring Innkeeper however, may actually need income from other sources to make ends meet; on the other hand the additional income may be necessary to offset paper losses shown on the inns tax returns when underwriting a loan request.

A Pre-Approval differs from Pre-Qualification in commercial lending, in that the “Pre-Approval” is issued after an preliminary underwriting determination has been made.  The buyer’s qualifications, and the data from the commercial property are combined to assess the risks verses the merits of the loan application.

Financial records on the business/property being acquired will be needed to determine that the Debt Service Coverage Ratio (DSCR) will comply with general underwriting guidelines after items such as depreciation, officer’s salaries, mortgage interest and certain non-re-occurring expenses are added back to the net profit/loss.   A Pre-Approval will issued conditioned upon certain events and due dilligence has been compleeted.  After all data from the borrower’s and the subject property is compiled and analyzed by one of our Commercial Loan Underwriters.

The following items will be required on the subject property before a Preliminary Pre-Approval can be issued:

1. Three years of business Federal Tax Returns
2. Year to Date Balance Sheet/P&L
3. For comparison purposes, Year to Date Balance Sheet/P&L for the same period for the prior year
4. A detailed list of capital improvements made within the last five years
5. Photos of the property or Web Address

Please read our Pre-Qualified Buyer Overview for more details.