The ABCs of small commercial mortgagesSteve Kapalkasmall commercial lending, niches
For many residential mortgage brokers, commercial loans can open
the door to a whole new world of opportunity and income. Small
commercial loans, which are deals up to $1 million, have many
similarities to residential deals. These similarities allow many
brokers to add this product to their lending arsenal with very
little effort. If you are considering getting into the small
commercial arena, there are some nuances that you'll need to
understand before getting started. First, you need to keep in mind
that each commercial lender has its own niche in the market, just
as residential lenders do. Some will be more competitive in the
conforming "A" deals and some will offer products for borrowers
whose credit scores do not qualify them for a conventional deal. In
the small commercial market, you will find that some lenders are
driven by score, while others will look at overall credit
experience and history. Other lenders are specialists in lending to
self-employed borrowers or small-business owners whose tax returns
do not reflect all of their income. In either case, the general
rule of thumb when adding small commercial lending to your product
offerings is that your loan-to-value ratio (LTV) is going to be
lower and the rate is going to be higher than what your customers
see on your residential deals. Most commercial lenders are going to
max out at 80 percent LTV deals and sometimes even less if the loan
is to a borrower with sub-prime credit or is a no income
verification loan. Remember that the LTV on a commercial loan is
going to be driven by property type as well as credit quality. Keep
in mind that not all commercial property is the same, and you need
to clarify the property type. Since commercial properties can
sometimes be quite unique, most commercial lenders like to review
pictures of the building itself along with your loan submission. To
originate a commercial loan, you will need an application on your
borrower. Most lenders request a loan submission package with:
++A residential 1003 application or other completed application
form;
++A personal financial statement;
++A credit report and/or a tri-merge report; and
++An income and expense statement for the property (if it is a
multi-unit building).
When submitting a loan to a commercial lender, be sure to
provide the specific type of commercial property you have - office,
retail, mixed-use or multi-family, to name a few. Make sure that
your description includes the number of units in the property. To
expedite your transaction, it is helpful to give the lender the
rent roll with expenses. Make sure you understand that one of the
underwriting criteria that the lender will use is the
debt-service-coverage ratio (DSCR). This is the ratio of net income
from the property to debt service from the proposed loan. When we
talk about DSCR, we are analyzing the gross rents that the property
produces, minus any expenses the owner may incur - for example,
taxes, insurance and utility bills. This will be the primary income
analysis the lender will be performing to see if your loan is going
to qualify. Don't get hung up on calculating these ratios - as long
as you can provide the rent roll and expense numbers to your
investor, he will make the calculations for you. After you have
submitted your application with the appropriate information, you
should expect to hear from an underwriter. If the deal makes sense,
you should then expect to receive a conditional approval directly
from the lender. When this occurs, make sure that you understand
all of the conditions of the approval. Some loans will:
++Be a fixed-rate, fully amortizing 25-30 years with no
balloon;
++Have a balloon after five to 10 years; or
++Have an adjustable rate.
Also, make sure you understand the parameters of the
product:
++What is the base rate tied to?
++What are the margin and adjustment periods?
++What are the adjustment and lifetime caps?
Most loans carry a prepayment penalty (just like residential
loans, this is a penalty if the loan is paid off early) and others
have a lock period (which is a period during which your customer
cannot pay off the loan without paying a predetermined number of
months of interest plus a penalty), so make sure that you and your
borrower fully understand the ramifications of all of these
conditions. The last thing you should keep in mind is - are you
really dealing with the actual lender or are you dealing with a
conduit broker? Conduit brokers pass themselves off as lenders, yet
they are really functioning as the middle person between you and
your lender. This is very important so that you know that after you
meet all of your conditions, you are not going to have an account
representative call you at the end of the process and say that
there are some changes to the terms or that your loan LTV just got
cut. Also, be very wary of any lender that asks you to have your
borrower pay for an appraisal prior to receiving a full-blown
commitment letter. Many brokers new to small commercial lending
make the mistake of getting an appraisal done only to find out that
each lender has different format criteria or requires the report be
completed by an appraiser on their approved list.
To summarize, commercial loans are just as much like residential
loans as they are unlike them. Programs exist for every type of
borrower; you just need to find the right fit. Make sure you keep
in mind that in most cases, the LTV on a commercial deal is going
to be lower and the rate higher than on the typical home refinance.
Lastly, make sure you know your lender! It is your obligation to
protect your customer and give him the best possible service. You
should understand all of the terms and conditions of your
conditional approval and commitment so that you do not get any last
minute surprises. The more you know about the proposed deal, the
better you'll serve the customer, and as we all know, that leads to
strong referrals and thus more business for you.
Steve Kapalka is underwriting manager of Apex Mortgage Corporation, a bank
owned direct small commercial lender in Fort Washington, Penn. He
can be reached at (800) 262-2739, ext. 208 or e-mail
[email protected].
