This article was written for individuals who are attempting to undertake an investment property loan. In today’s market, it is not good enough to be a strong borrower. So we will discuss the dissimilarities between residential loans and commercial loans. Understanding the difference will help you get your investment property qualified for a investment property mortgage.
I will attempt to explain to you as to “the who, what, and why” of commercial mortgage loan. A big part of your success as a commercial investor is in choosing the right property. What follows is the straight scoop on commercial lending.
One of the most important difference between commercial and residential loans is commercial lenders lend their own money. When you apply to a residential bank or some residential financial institution, they underwrite the loan and then sell the loan to FNMA or FHLMC. The residential bank is repaid the money. Once the loan has been sold to FNMA or FHLMC, the residential lender will keep the servicing rights. Fannie or Freddie then bundle all those loans and pass them through to investors such as mortgage backed securities. In other words, the bank is not really lending their own money.
Commercial investment property loans are different because when you deposit funds into a bank account, the commercial lender turns around and loans out the money to companies like yourself. In commercial mortgage loans there is no giant like FNMA as in residential lending waiting to reimburse the bank.
If an investment property mortgage goes into default from non payment then the bank is stranded with a bad performing loan unless they can sell the property for a profit. Because of this, they are much more discriminating than they would be with residential loans.
Since 80% of all businesses fail within 2 years, the commercial bank knows that if someone does fall into financial difficulty the borrower will let their commercial investment go before their residence. And because investment property loans are commercial loans; the guidelines for underwriting are much stricter on investment property loans. Also understand that each piece of property is completely different and each type of commercial property is underwritten differently. Investment property financing are deal-specific.
In today’s market you have to be a strong borrower and have a strong cash flowing property or no one will loan you the money. The most important part of the commercial underwriting process is the PROPERTY.
I had a client that was mad that his loan was denied by our underwriter for commercial mortgage loan. His message was something like this:
“You are an incapable idiot! Lenders should be knocking on my door because I have lots of assets, impeccable credit, considerable income, and a property worth $600,000. I should have no problem getting $390,000 cash out.”
The issue with the commercial loan wasn’t the borrower. The reason we denied the client was the property was losing money. The borrower thought his property was worth $600,000 but based on the cash flow, it would not appraise for more than $200,000. No one is going to loan $390,000 on a place only worth $200,000!
Through discussing the issue with the client, we discovered he had been trying to get a commercial mortgage loan approved for some time! The good news is that we were still able to find investment property financing for this client through another program. And even better news is that if your deal is strong and you utilize a knowledgeable commercial broker or lender, there is commercial money available. Now you know why commercial lenders are more vigilant when it comes to lending their own money.