The Commercial Corner: Using the interview process to understand commercial lending programsMike BoggianoCommercial lending programs
The Mortgage Press is pleased to present "The Commercial
Corner," a monthly column by Mike Boggiano of Silver Hill Financial
LLC, dedicated to answering your questions about the commercial
mortgage marketplace. If you have a question that you would like
answered in a future installment of "The Commercial Corner," please
e-mail
[email protected].
Q: Can you explain the primary distinctions between
underwriting for commercial and residential loans?
A: Most commercial lending programs focus on
underwriting only the underlying property. This traditional
approach is called "debt service coverage ratio" (DSCR). DSCR is
calculated by taking the subject property's gross monthly rents,
minus the subject property's monthly operating expenses, divided by
the subject property's monthly qualifying principal and interest
(P&I) payment. In addition, lead times are typically a minimum
of 90 days and credit committees are often involved, making
individualized deals and a non-standardized process
commonplace.
By contrast, the more familiar debt-to-income (DTI) ratio used
in residential underwriting quantifies a borrower's debt
obligations as a percentage of his or her income. The process is
more standardized and predictablenot to mention faster.
But, there's good news for residential brokers and loan
originators who recognize that as rates rise, so does the need to
diversify. The commercial marketplace--particularly the
small-balance arena--presents considerable opportunity for
residential mortgage professionals to expand their client base,
product offerings and income. Fortunately, some commercial lenders
are making strides in simplifying the underwriting process. One
recent innovation uses a residential-style DTI qualifier, giving
strong borrowers the opportunity to obtain favorable loans.
Q: How does the DTI approach work for
commercial?
A: This commercial method resembles a full-doc
residential program. Borrower eligibility is based on credit
scores, assets, the DTI ratio, income stability and LTV. The
primary benefit is that the borrower's ability to repay the loan is
established by drawing upon all income sources, not just that of
the property. In this respect, the process is easier for both the
broker and the borrower. For example, a customer with strong
credit, income and assets is interested in purchasing a property
that needs renovation before it will produce cash flow. Here, the
borrower could lose out on a favorable loan under the traditional
DSCR method. But, if a DTI approach is applied, the borrower's
financial stability allows the loan to pass, thus enabling the
borrower to make a smart investment.
Q: What are the components evaluated in a commercial DTI
ratio?
A: The main difference lies in taking into
account the subject property's monthly P&I payment, along with
the primary home's PITI (payment, interest, taxes and insurance) or
rental payment. The remaining components considered are car leases,
installment loans, student loans, private notes, a percentage of
credit card balances and child support/alimony payments, which are
similarly used in a residential loan qualification process.
Q: Does a borrower have to pass a DTI and
DSCR?
A: The short answer is "no." Most commercial
programs only utilize the DSCR, with ratio guidelines that differ
by lender. If a program does feature a DTI approach, it's likely in
order to improve the borrower's opportunity for approval. In this
case, once it passes the DTI, the DSCR would be unnecessary.
Minimum DTI ratios are set by the lender.
Q: What documentation is needed in a typical DCSR
approach?
A: Each lender will have unique requirements,
but in general, requirements include the past two years'
year-to-date financial statements and tax returns. In most cases,
you will also need current, fully executed leases or rent rolls (if
the property type is multi-tenant retail, an office or a
warehouse).
Q: How can I find out more about a commercial lender's
underwriting style?
A: A phone call or visit to the company's Web
site should yield this information. If not, this is a good question
to ask in the initial lender interview. Colleagues are a good
resource for referrals; ask around for recommendations from
successful commercial brokers or residential peers who have
branched out into commercial loans.
With rates steadily rising, now is a great time to diversify.
Leverage your existing client base for opportunities in
small-balance commercial loans, where you'll find less competition
for business and a formula for success.
Mike Boggiano is senior vice president, national sales
manager for Silver Hill Financial LLC. He may be reached at (877)
676-1562 or e-mail
[email protected].
