Drycleaners News
April, 2003

FINDING MONEY TO GET THROUGH HARD TIMES:
A Dry Cleaner's Guide To Choosing And Working With A Home Mortgage Lender

By Michael L Moskowitz CPA
President, Equity Now
www.equitynow.com
New York

In this slow economy, many dry cleaning owners are finding it difficult to quickly obtain the financing they need to get their businesses through tough times.

One owner had this experience when his first attempts to obtain financing did not work. The dry cleaner was denied an unsecured loan by his bank and his credit cards were used to capacity. The bank would not give him a loan because his business typically did not follow normal profit and loss patterns. "Banks shun people who can't fully disclose everything and present tax returns or W-2s to verify income," he said.

Then the dry cleaner heard a radio ad for Equity Now, a Manhattan-based direct lender which I founded in 1984. He learned that we specialize in self-employed people who cannot verify income, do not necessarily have perfect credit, need large amounts of cash out or just need to close within a week or two.

One of our loan officers talked with the dry cleaner. We reviewed his application and agreed to lend him $400,000. The benefits included paying off $20,000 in debt, a cash out of $15,000, consolidation of credit card loans, and refinancing of his mortgage at a lower rate that saved him $300 a month in payments.

The dry cleaner was fortunate in being able to obtain the loan necessary to meet
his business and personal needs. Many of his colleagues are rejected or stonewalled by banks and other mainstream lenders who do not understand the dry cleaning business including depreciation and tax situations. Banks tend to focus on full income check loans and pay close attention to credit scoring, which can be a problem for dry cleaning owners with cyclical ups and downs. Banks take a long time approving loans.

As a result, some dry cleaners will take what they think is the next best option and call a mortgage broker who appears to be offering low rates and fast action. Such a choice often has a disastrous ending. The borrower learns to his consternation that brokers are mere middlemen with no ability to make lending decisions or lend money. They are agents trying to place your loan with a lender and the applicant many times ends up paying high fees and rates.

We lent money to the dry cleaner in our capacity as a direct lender which differs from banks and brokers in distinct ways. Unlike brokers, direct lenders make lending decisions and actually make loans. And unlike banks, direct lenders are not snarled in bureaucratic procedures. Many direct lenders specialize in borrowers who are good risks but who have unverifiable income and possibly blemishes on their credit records. Small business owners including dry cleaners many times find themselves in these circumstances.

Advice for the Prudent Borrower
Whether you take my advice and seek out a direct lender or settle on a mainstream bank or broker, I would advise you to be methodical and prudent in the decision-making process from beginning to end. After all, this is one of the most important financial decisions you will ever make.

Preferably you should get a referral from somebody you trust. If not, then advertisements in respectable media are one place to start in selecting a lender. Read and listen to advertisements carefully. Many ads mislead about rates and credit eligibility. Beware of companies advertising unusually low rates. Low rates either mean high points or that a bait and switch is taking place. For example, if the general market for a 30-year fixed rate loan is 6% with no points and you see an ad for a 30-year fixed at 5.375%, and learn that the rate requires 4 points be paid --- that's just a plain old come-on. True low rates are usually reserved for people with absolutely perfect credit and full income verification.

In making the decision on whom to go with, keep in mind the distinctions cited earlier between banks, direct lenders and brokers. Choose your lender wisely. Big banks can take up to six weeks to approve a loan and provide the money.

Large, old-line finance companies may overcharge on good credit, larger loans. For people with less than perfect credit, direct lenders may be the right choice because many of them are experts in this area.

Once you have selected your lender, the process of care and scrutiny is far from over. As you negotiate, make sure the lender you are working with is giving you the information you need.

Know what you're paying for! Know the closing costs in advance. If you do use a mortgage broker, you need to know that the size of the broker's fee will affect your payment for the next 15 or 30 years. Insist that the broker give you in writing on letterhead, in advance, the fee as a percentage of the loan amount including any monies paid by the lender under the table to the broker. That way, the broker can be held responsible.

Know how long each step of the process will take and get it in writing! If timing is important to you and it often is to a dry cleaner working to meet expenses in tough economic times, then you had better know up front when you will receive your money. A lender can get a borrower on the hook and then keep him or her waiting for weeks, only to inform them late in the process that the loan has been denied or that the terms have taken an unfavorable turn. Some lenders approve loans themselves in-house and make fast decisions. But other lenders must send the loan applications out to a third party, a process that can take weeks before you receive an answer. Make sure the lender you work with approves in house.

Watch for "bait and switch" practices! If an offer is too good to be true, then it is probably not true. Make sure all costs are accounted for and confirmed in writing.

You don't want to be promised a low rate, then at closing have a dishonest person trying to explain why you are being charged more. This problem can be avoided by making sure you are working with a reputable lender, who has been verified by the Better Business Bureau and the State Banking Department for a history of complaints.

Getting low cost funds on one's home, as our dry cleaning owner found, can be a satisfying process reaping important benefits in these troubled economic times. But to achieve your desired goal, you need to deal with the right people. Choosing the right lender will get you where you want to go. Choosing the wrong company will get you into deeper trouble than when you started. The steps are not difficult but they must be followed if you and your business are to benefit from the equity in your home.