Expanding into commercial business means becoming familiar with the lending options available today, and quickly determining the best fit for the situation
What is the main difference between a good commercial mortgage originator and a great one?
Top mortgage pros tend to exhibit the same characteristics, like responsiveness and attention to detail. But the mark of a true solution provider is the ability to review a financing request and quickly determine the best fit within today’s spectrum of commercial mortgage lenders.
With a wide range of lending options available, originators have their work cut out for them. Misinterpreting a borrower’s motivations or misrepresenting credit or property information when working with lenders can lead to delays or denials.
The key is to know what to look for when reviewing a prospective borrower’s loan request. Here are 3 factors to review when qualifying commercial mortgage deals.
The diversity among commercial and multifamily properties, even of a particular type, can be staggering. Just think of the various multifamily properties one may come across in a typical American town—large apartment complexes, 5-unit properties, and anything in between could be involved in a commercial loan transaction.
As a result, originators must dig deeper when reviewing a property to get a better sense of where to submit the deal. They can accomplish this by asking themselves a few key questions: Is the building located in a rural area? Has it been recently stabilized? What is the current occupancy of the property? These are basic questions, but they can help a mortgage pro quickly disqualify some of the more conservative lenders in their stable.
One can also take a step back and review the property type itself. Some property types are likely to be eligible for financing no matter the lender, such as standard multifamily, mixed-use, and retail buildings.
Others, such as automotive properties or restaurants, are considered to be riskier and are often excluded from a traditional lender’s list of eligible property types. Special-use properties, like ice rinks and bowling alleys, create more challenges still for originators seeking lending options for their clients. To be clear, alternative financing solutions do exist for most types of commercial property types. It may just be that the borrower will need to accept a higher interest rate and less flexibility on terms.
With a deep understanding of commercial properties and the challenges they represent, originators can set expectations for their borrower and reach out to lender contacts who are most likely to approve the financing request.
In a general sense, commercial mortgage transactions are approved or denied based on a lender’s determination of the subject property’s ability to generate sufficient revenue to cover the debt. But lenders also closely review the prospective borrower before they make an approval decision.
Even novice commercial mortgage originators are likely familiar with the types of information lenders will want to review, such as credit history and tax return documentation. Borrower issues involving bankruptcy, tax liens, and foreclosure are clearly going to make it more difficult to obtain financing. Reviewing a prospective borrower’s credit score, however, involves a bit more nuance because originators must be able to compare the borrower’s credit score with the guidelines of each lender in their stable.
Those who take the time to learn how their lending partners operate should be able to qualify their clients fairly quickly. Borrowers with high credit scores will naturally be a strong fit for bank lenders, while those at the lower end of the spectrum will have more success working with private or hard money alternatives.
Qualifying based on the severity of documentation concerns may not be as obvious upon the initial review of a prospective borrower’s loan request. If the borrower is a real estate investor or a self-employed professional, they may feel as though their tax returns reveal an incomplete picture of their financial success. In other cases, the accounting strategies business owners use to minimize their tax liability make it more difficult for a lender to get a true sense of revenue generated in the previous year.
Originators must work closely with their clients to get to the root of their documentation issues. If it becomes clear that the borrower won’t meet bank guidelines, the originator can then look for reduced documentation solutions provided by alternative lenders. The underwriting for these types of loans may involve the review of other documents, such as business bank statements, in lieu of tax returns. However, borrowers who would simply prefer not to submit tax returns may need some counseling. If the originator explains that those who submit full documentation are likely to secure the lowest loan interest rate, their borrower may change their tune.
As long as mortgage pros ask questions and actively listen to their clients, they should be able to obtain the borrower information they need to better qualify each deal.
Fully understanding the borrower and subject property are important aspects of deal qualification, but originators must learn as much as possible about the actual financing request as well.
Why is a particular borrower looking to refinance their office property? Are they looking to tap into their equity so they can purchase new furniture? Do they believe they can qualify for a longer-term, lower-rate loan now that they’ve stabilized and re-tenanted the property? Are they merely in need of a refinance solution to avoid a fast-approaching balloon note? These questions help an originator position the financing request when speaking to their lender partners. In some cases, such as the balloon note example, they help an originator know how fast they need to work to provide a solution.
The borrower’s motivation for financing can be enough to disqualify certain types of lenders. Those looking to take a large amount of cash out of their existing mortgage will likely require alternative financing options. On the other hand, an investor who has made significant improvements to their commercial property may now qualify for a low-rate bank loan.
Mortgage pros can learn a great deal from the requested loan term alone. Borrowers seeking a 30-year fixed rate loan are going to need a far different solution than those in need of a three-year bridge loan. A commercial lender will typically specialize in a certain type of transaction, so it makes sense for an originator to develop relationships with different lenders based on their loan term guidelines.
Merely knowing whether a transaction is a purchase or refinance isn’t enough in the commercial lending space. Originators who take the time to learn more about the financing request itself will find themselves in a much stronger position when submitting the deal to lenders.
The ability to quickly qualify commercial mortgage deals is like any business skill – it takes time to develop, especially for those who are new to commercial lending. Focusing on the development of this skill, however, will pay dividends as originators start to generate more commercial leads and lender relationships. Clearly understanding a borrower, their property, and their motivation for financing can help a mortgage pro go from good to great during any transaction.
Zack North is the director of marketing for Silver Hill Funding.