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Forward on reverse: Insights for marketing to maturity: Part IV: A different kind of customer

Mar 27, 2006

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].
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