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: How can I turn problematic borrower scenarios into
A: In the commercial lending arena, certain types of borrowers or deals are habitually viewed as problematic. As a result, many lenders and originators find themselves saying no to would-be borrowers, realizing the traditional roadblocks to obtaining a loan. However, a better approach is to view these situations as unique opportunities to attract a very targeted, underserved segment of borrowers. In other words, carve out a niche instead of dealing out a no.
Three distinct, yet interrelated, areas come to mind. Here's a description of each, with insight for capitalizing on business that others might be turning away:
Generally speaking, most lenders have a limited appetite for financing small-balance commercial loans, preferring to invest in relatively low-risk properties that have cash flow with a strong debt service coverage ratio, the traditional commercial analysis method. Owner-occupied properties tend to be limited tenant buildings. The fewer the number of tenants there are, the riskier the property is. In other words, it is more difficult to debt service if one out of four tenants is lost than if one of 14 is lost. In addition, traditional lenders rarely debt service these properties, because only the non-owner-occupied units are generating rent.
While some may consider owner-occupied properties to be a problem, it would make sense to instead turn them into prospects, and with the right lender, these deals can be easily funded. For example, a small-balance commercial lender using a debt-to-income (DTI) underwriting approach a niche in its own right would be a good fit to fund limited-tenant, owner-occupied properties. In some cases, the DTI ratio can even be stretched for a higher tolerance of approving the deal.
Many self-employed borrowers understate their taxable income by declaring losses or overstating expenses anything to bring down the income on which they will be taxed. A bank looks at the bottom line or net income, using this figure to approve or deny a loan. Usually, as a result, hard money or stated programs are the only viable source of financing for this group of borrowers.
By contrast, a lender who examines tax returns to figure a self-employed borrower's realistic net income adding back in the figures that are overstated or understated would be able to approve more deals. In realizing the commonplace tax strategies of self-employed borrowers, an innovative lender, with the right approach to analysis, might even qualify a self-employed borrower for 90 percent loan-to-values, among other attractive options and rates.
Last month's column gave attention to the difference between traditional commercial DSCR underwriting, versus the more familiar DTI approach used in residential deals. As mentioned with owner-occupied properties, traditional lending institutions only approve properties that debt service that is, they generate more than enough income to pay the mortgage, insurance, taxes, maintenance and operating expenses incurred by the property. Typically, banks look for a property to generate at least $1.20 in revenue for every $1 of expense. If this ratio falls short, they will, most often, pass on the deal.
In a DTI analysis where the focus is on the borrower's personal ability to carry the debt on the loan, many of these rejected deals would be considered and funded instead. And, on top of the process being easier for both the broker and the borrower, a DTI underwriting approach has added benefits. First, a commercial lender with DTI underwriting has the ability to finance vacant properties or those with inadequate debt-service ratios. For example, examine a property that needs renovation before it can produce income; with DTI, a strong borrower could potentially get the funds needed for a profitable investment. Second, in markets where values are high California, Arizona, New York, Florida or New Jersey, for instance it is extremely difficult for properties to generate enough rents to carry a high LTV. The higher the LTV is, the higher the debt load will be, and the harder it is for the generated rents to carry a high mortgage payment along with related property expenses. The same scenario under a DTI analysis may yield an approved deal based on the borrower's DTI ratio. This approach may even allow for a 90 percent loan-to-value in some cases an impossible feat if relying on the property's debt service.
These are a few examples of areas where a savvy broker, working with the right lender, can turn problems into profit.