In a perfect world, you could start a company with a brilliant concept, obtain funds right then and be financially stable on your way to realizing your dreams. However, not all stars are aligned in the business spectrum. To some investors, rigorous startups loosen their chances when they get rejected for their business loans. Here are the why`s of the commercial loans knock-back.
The fantastic deal goes with 65% approval of commercial real estate loans. However, the downside indicates 35% rejection for several reasons.
Why do some commercial loans go on the blink?
The 2017 National Association of REALTORS survey reveals the following contentions:
- Since the approval requirements depend largely on the borrower (down payment, documentation, and others) there is a huge tendency that the loan underwriting procedure fails to about 59% in commercial real estate loans.
- The property`s appraised value results in a further 15% commercial real estate default due to a lack of net operating income, economic obsolescence, or declining finances
- Another 14% are turned down because of a lack of funds. In case of credit won`t pass the underwriting process, the lender may adjust the loan`s conditions such as lowering the loan-to-value (LTV) ratio or withdrawing it entirely.
- The remaining 12% of commercial real estate loan disapproval lies on unrelated causes.
What Impact Net Operating Income Has on the Upshots of Small Balance Commercial Real Estate Loans?
Net operational income (NOI), which is useful to owners and investors of commercial real estate, represents the value of a property that generates money. You might estimate the revenue stream of a building by computing its NOI.
A lot of self-employed investors and small-time company owners who frequently deduct costs from their income to reduce their tax obligations are involved in the residential investment and small-balance commercial real estate markets. Although it is legal, this creates an impact on a borrower`s potential to get commercial and investment real estate loans.
It is perplexing to note for W-2 workers (paid through their employer`s payroll), self-employed investors, and small company owners to qualify for Government- Sponsored Enterprise loans since banks and wholesale lenders must adhere to strict underwriting rules. This 59% of loan rejections usually take place at the underwriting stage. Thus, the borrowers resort to direct portfolio lenders who bend the rules in their favor and provide lower LTV to make up for a lower net operating income.
How to Prevent Financial Issues Repercussions?
Commercial real estate lenders avoid wasting their time by making false promises. Hence, they must first devote their time to submitting the loan requirements for evaluation so as to determine the likelihood of closing commercial real estate loans.
A keen touch of awareness of the company`s financial problems is a skill shared by some commercial brokers. Newbie brokers often ask their finance partners for an instant evaluation of closing. However, a savvy partner who is familiar with the difficulties of closing small-balance commercial real estate loans determines the probability of a quick close in a few minutes time.
No matter how depressing, a loan refusal does not spell the end for a business’s chances of survival.
Rejecting a loan application for a firm might help the company think about the many things that lenders take into account. This will guarantee that the company is better prepared for the subsequent loan application.
Investment property loans are used in the acquisition of properties to be used for income. This means that when a borrower plans to purchase a property and not live on it and instead has the intention of earning an income through renting it out, selling it in the future, or operating a business. The properties may include one-to-four residential units, apartments, and commercial buildings.
Investment Property vs Residential Property Loan
So, how do investment property loans differ from residential ones? First, investment property loans have shorter repayment terms which range from one to twenty years. For example, a lender may take an investment property loan with an amortization period of 20 years, he may opt to make the payments in five years and then make a one-time payment at the end. There might be some risks though since credit markets are volatile. But lenders may also prepare a backup plan like applying for a Flex-Perm loan with Marques Direct, which is amortized for up to 30 years.
Another difference is the loan-to-value (LTV) ratios. The LTV refers to the ratio between the value of your property and the amount you’ve mortgaged it in. Residential properties are allowed with up to 100 percent in their LTVs, on the other hand, investment property loans fall into the 60-80 percent range. Having a lower LTV equates to a lower interest rate.
Investment property loans are more concerned with a property’s value and how it can generate income. With this, there will be lesser personal financial requirements a borrower will submit before being approved. This then is perfect for self-employed and small business owners who plan to invest but find it difficult to meet the requirement otherwise needed for a residential property loan.
The Loan Process
Different lenders process investment property loans differently. Banks and wholesale lenders, issue loans and then sell them to a third party like Fannie Mae, Freddie Mac, or the FHA. To have their loans purchased or guaranteed by these companies, lenders must adhere to their tight underwriting requirements. Furthermore, the Federal Reserve imposes lending concentration limitations on banks, limiting their exposure to investment property loans. Banks respond by offering investment property loans only to their most valuable customers.
Direct portfolio lenders, on the other hand, keep, maintain, and service their portfolio of investment property loans rather than selling them in the secondary mortgage market. They generate money from the interest between their interest-earning assets and interest paid to their mortgage portfolios. With this, their restrictions are not as strict as compared to banks and they can set their criteria as to who can qualify or not.
The bottom line is that in investment property loans, an investor purchases a property and leases it out. They earn from the rent paid by tenants and earn their ROI also when they decide to sell it in the future. As the basis for approval, lenders usually look at the value of the property and if it has an income-generating potential, add to that the creditworthiness of the applicant. Since banks have limitations, direct portfolio lenders offer more advantages as their requirements are not as stringent and they offer more flexibility.
The acquisition of investment properties has seen an increase over the years. This is not a surprise since it provides investors profit not only from rental revenues but can also create a profit when investors decide to sell the property. With the growing economy and a reported shortage of new homes, investors are eyeing investment properties even more as a good source of passive income—another opportunity for brokers to dip their toes into.
Just like anyone else who is affected by the ups and downs of the economy, brokers also face several challenges from complex residential lending rules and regulations to stricter Consumer Financial Bureau Regulations. With this, it may be high time to break into investment property financing for it offers many advantages and bigger paychecks. As a broker, you may be hesitant to do so, but fear not, if you already have experience with residential properties, it is not as complicated as it sounds. Here’s how:
Team up with a Lender who has Experience in Investment Property
Partnering with a lender who accepts residential investment property deals utilizing a “residential style” submission package – 1003 application, a credit check, and a straightforward property rent roll. Avoid at all costs the intricate loan packages, executive summaries, and documentation requirements that require years of experience to perfect. Your chosen account executive (AE) will be your driving force-choose one who is experienced, it will make a difference. Since the AE is at the forefront and will coordinate and process loan applications- team up with one who knows how to get deals done, they will not only make the financing process more smoothly, but they can also help prevent issues in file submissions.
Simplicity, Efficiency, and Loyalty are Keys
Do not be overwhelmed. Since you are still starting, start simply. Find your niche and stick with it. Do not try to deal with everyone. Decide on what particular clients, property type, and mortgage program you want to try first. Once you have the hang of it and are ready for more, be efficient with your processes to avoid backlogs. Be quick to provide requirements, and documents so appraisals can be done on time. Appraisals for investment properties take more time compared to that of residential ones so if you fail to provide what is necessary on time it would likely mean a delay in your paychecks as well. Use a loan processor, to speed up the process even more. But most importantly, stay loyal to your lender. If you have found one who supports you-then you have all that you need.
Learn the Job
Know everything there is to know about investment property financing — you can read, study and learn from other lenders but you learn more by doing. Learn from your own experiences and evaluate what you have done right and wrong and repeat the process. This is the only sure way of learning about the commercial property market. Remember, there is always something new to learn.
Build a Client Base
The secrets are networking, marketing, and meeting prospects. Get out there and connect with investors and real estate agents. You can post online ads, send emails, and attend investor meetings. Ask former clients if they possess any business or investment properties. Print some business cards and distribute them whenever you have the opportunity. A website might also be helpful. Read on SEO and SEM.
Above all, build a reputation for excellent, honest service. Treat your present and future clients right. Be transparent with your clients and offer options and solutions.
If you are looking for one, then this might be the sign to start working on closing that first investment property deal. Start now and see where it takes you.
An investment property mortgage is usually used to finance real estate property that is purchased in order to generate income through rental income. It can open up more chances for mortgage brokers to offer more products and services to expand their business.
But why is it that many mortgage brokers tend to back off from presenting this to their clients? Though opportunities are high, the usual impression that comes to mind is that investment property mortgages are more complicated to offer to clients than other mortgages like consumer mortgages. They tend to be afraid that they might not be able to fully explain the program to the clients. The thought of the complex and time-consuming process also is their concern.
Consumer Mortgage versus Investment Property Mortgage
Many new and enthusiastic business owners apply for an investment property mortgage with the wrong or inaccurate idea that it is just the same as a consumer mortgage process. But it has its own details that make a distinction from a consumer mortgage. Let’s find out what the main differences in the process that an investor should be aware of before applying for a loan to support growing business and to help them make more informed decisions.
For loan applications, Fannie Mae 1003 Form is the standard loan application form used by most lenders. At Marques Direct, there is no difference in the application forms for consumer and investment property mortgages. Indeed, most of its brokers have an easier loan application which is more convenient for investors.
Sometimes people use investment property to refer to purchasing a home to live in because, for them, the property is a big investment. But investment property usually means buying a home to be rented out for profits. The additional income that an investment property carries through rental is usually the main reason why a lot of people own investment properties. If the property is fit for the intended purpose which means none or just a little maintenance is needed, the income becomes passive. Less work but still earns a profit. In consumer mortgages, applicants need to show proof of income to substantiate that they have the capacity to pay.
The Bottom Line
Mortgages are crucial to the part of borrowers who don’t have the money to buy any property they want anytime. So it is important to really understand what type of mortgage to choose according to your needs. Learn to look around and study different lenders so that you will be able to get the best deals.
Do you bank on your assets or do you declare a very little amount on your tax returns that most mortgage lenders decline to provide you with a good mortgage offer?
It`s frustrating to note that though you have more than enough funds to get approved for and to finance a mortgage, nobody will even give you a chance. An asset-based loan is a sure win for your lending need.
What you should know about Asset-Based lending?
Asset- Based lending is a loan based on your assets such as real estate, rather than your income or working capital. After the down payment, closing expenses, and necessary reserves, the asset-based mortgage amortizes your assets or calculates your loan eligibility by distributing your assets across the mortgage period. The conditions of asset-based loans are depending on the value and nature of the assets being pledged as collateral. Asset-based lenders often offer money based on a predetermined portion of the asset`s worth, which is typically between 70 and 80%. Private lenders, who don`t often have the same standards as banks are the ones who frequently offer these types of loans.
What Properties are Eligible for Asset-based Loans?
Loans for investment properties comprise non-owner occupied residential 1-4 properties (single-family houses, townhomes, and condos), multi-family (apartment) buildings, mixed-used structures, and commercial properties used for “business” reasons. Thus, a property is eligible as an investment property if the borrower purchases it with the goal of generating a profit, whether through rent received from tenants, a potential sale of the property, or the operation of a corporate organization.
Who Offers Loans for Investment Property?
Loans for investment and small-balance commercial properties are offered by the majority of banks, wholesalers, conduits, hard money, and non-banks like finance lenders. These lenders originate and sell loans to Government- Sponsored Enterprises (GSEs). Though these lending entities normally provide the lowest rates, they are obliged to adhere to the rigorous underwriting standards set out by GSEs, together with the thorough verification of the borrower`s income and credit history. The residential 1-4 and multi-family structures are the only types of real estate investments accommodated by GSEs.
Other banks utilized customer deposits to finance investment property loans but they still have to follow the limitations on the concentration of lending by the Federal Reserve. This is possible through selective lending that offers loans only to existing clients with good credit standing and makes deposits.
Why do Asset- Based loans Make Sense?
1. Mortgages can be acquired without a minimum wage. Second residences may be financed through asset-based mortgage loans.
2. Compared to normal programs, the eligibility restrictions are loosened.
3. You may leverage a house investment while maintaining and growing your current assets.
While you eye an asset-based investment property loan as a surefire to their financial needs, thinking of its cons may help you decide its equilibrium.
What are the drawbacks of Asset-Based Lending?
1. High rates of interest
2. Frequently demand significant upfront payments
3. Less time to repay means shorter periods
4. More dangerous than conventional funding
If you have a sizable amount of liquid assets, you are eligible enough for an asset-based mortgage. Asset-based lending may increase your investment opportunities. Hence, be sure to use win-win decision-making to thoroughly look for potential lenders who offer loan conditions that best fit your overall budget and schedule.