No doubt the mortgage fallout has changed the world of lending. The good news is that lenders have money to loan and want to lend it out. The bad news is that it’s not as easy to get as it was at one time.
What is the residential or commercial lender looking for from a borrower? What are the general parameters for these loans?
One important area for both types of loans is the relationship with your lender and/or bank. If you are a good customer, your chances of getting a loan with them can be enhanced. Being a “good” customer can take on different definitions, but generally it means being a customer for over three years, using multiple services beyond a checking account and having some type of borrowing history. Also, if the lending decision could go either way, the relationship could tip the scale in your favor.
The rules for residential lending apply to properties up to and including four houses on one site, commonly referred to a four-plex. Generally, the down payment for residential loans is between five and ten percent, and the term is usually thirty years. Appraisal fees run around $250, and the underwriting fee (assessed by the lender to write the loan) is about one percent of the loan amount. Other significant, but optional, fees are used to reduce or “buy down” the interest rates.
If the house is going to be your primary residence (owner-occupied), the lender is oftentimes permitted to make concessions for the credit approval based on house value, sufficient wage/cash flow to support repayment, credit scores and bank statements. These loans are personal, so the approval is all about the buyer’s financials. In the case of rental property, mortgage brokers will include rental income and expenses in the total income available to make the loan payment, but in the end, the decision to loan lies with the borrower’s ability to repay, and sometimes without relying on the future rental income.
Commercial properties include residential dwellings of five or more units and buildings used for office, retail and industrial purposes.
There are two types of commercial loans: conventional and Small Business Association (SBA) commercial. Generally, the down payment for a conventional loan is between twenty and twenty-five percent, whereas SBA loans require between ten and fifteen percent. In either case the loan amount is amortized up to twenty-five years for the conventional and up to thirty years for the SBA. Unlike residential loans where the interest rate remains the same throughout the loan period, the interest rate on commercial loans is generally shorter, fixed for only ten years at which time the rate could be reset to current market rates. Also, appraisal fees are substantially higher – locally they run around $3,500. The underwriting fee for a conventional commercial loan usually run approximately one percent of the loan amount, but is negotiable. SBA fees are set by the Federal Government and vary depending on the type of loan, e.g. equipment, real estate or acquisition. The rate range is 1.5%-3% of the loan amount.
Whereas on the residential side the focus is on the borrower’s personal financials, for commercial loans heavy emphasis is placed on the business plan and leases. Three sources of repayment are identified.
- Cash flow from the property or main business. Ideally the property or business supports the loan payment without dipping into owners’ income or reserves.
- Sale or liquidation of the collateral. Some discount on the value is applied in case a rapid sale is needed.
- Owners’ assets and other income.
In the underwriting process cash flow is analyzed, and ratios are applied similar to what Paul explained to Jade.