Building A Case for Commercial Mortgage loans

Commercial property financing has become more popular over the last five years, and even more so in the last eighteen months. The popularity of this type of mortgage loan can be attributed to events that devasted the residential mortgage market due to the subprime meltdown.

For many years the mortgage industry thrived on the purchase and refinance of residential properties until about eighteen months ago when mortgage lenders began to close down. Due to the implosion of some high profile  mortgage lenders and subsequent tightening of regulations governing residential real estate financing, more mortgage professionals have set their sights on the commercial mortgage loan as a means of replacing lost revenue they experienced as a result of the collapse of the residential market.
The commercial property tells a unique story


The commercial property represents to the purchaser, broker and  lender whether or not it is mortgageable and, in many cases, how it should be mortgaged. Whether a short term Interest Only Balloon loan or a longer term amortized loan is more suitable based on the property's historical performance.

Unlike residential property financing when the borrower's income, employment history, credit history and personal assets are the determining factors in the mortgage approval process the commercial will usually be approved or disapproved by utilizing the income & expense history of the building. In fact, the borrower in a commercial mortgage transaction need not be an individual but can be an entity like a corporation, partnership or other legally established entity.

The term "Net Cash Flow" creates a lot of interest 


It is a term commonly used in the qualifying process of commercial properties. The term is relatively simple to understand because it is really self explanatory, but what is not so simple to understand is how to calculate the Net Cash Flow (NCF) of any particular property.

 The NCF of a property, in most cases, is the key factor in the qualifying process of a commercial mortgage loan. Simply put, it is the difference between Effective Gross Income (EGI) of a building and the Operating Expenses (OE) and is calculated over a period of time - generally 2 to 3 years - to determine a growth or regression. It is therefore very important for a prospective purchaser of commercial property to know NCF Growth rate and whether or not the building is operating in the black.

Purchasing with your head, not over it


Although a building may present a beautiful exterior, excellent curb appeal and exquisite decor which would attract most prospective purchasers of residential property, the purchaser of commercial or investment properties must avoid the temptation to "follow your heart" in their decisions to purchase because that seemingly ideal building may present a totally different picture if it fails to service the debt that will inevitably result from the purchase.

Let the numbers tell the story. Debt Service Coverage Ratios (DSCR), Vacancy Factors (VF), Net Operating Income (NOI) and other ratios and factors are important calculations which will assist the decision making process of the purchaser but, equally as important, the same numbers are relied upon by the broker and the lender's underwriter when qualifying the building for financing. If the numbers don't add up to support a positive cash flow, the purchaser may be getting in over his or her head.

Transitioning from sluggish residential to vibrant commercial


When events change the way things are customarily done, there is generally a transition period which is created that we must employ to acclimate ourselves with the "newness" of habits and systems we are thrusted into. These new habits and systems are comprised of education through touch, feel, trial & error, unfamiliar activity and in many cases, failure.

It all happens in a very short period of time because circumstances do not provide a convenient schedule; but ultimately our successes relate directly to those transitional experiences.There are many in the mortgage industry who are presently going through that transitional period from the residential mortgage business as a primary income source to the pursuit of acceptable competency in the commercial mortgage arena and ultimate success as a commercial mortgage professional.

Success begins with effective communication - Language


Commercial, Real Estate, Mortgages, Net Cash Flow, Investment and Debt Service are only a few of the terms that are used in the commercial mortgage business which many people are already familiar with, and if we can agree that one of the more important requirements of any given field is knowledge of the vocabulary and terms specific to that field, then we should also agree that the first steps one should take when entering a new field is to learn the language.

Although I'm not prepared to delve into an explanatary excerciseon the language of the commercial mortgage industry, I can suggest that anyone who wishes  to learn more about this subject will find  C-Loans to be an abundance of information . For those who already participate in the commercial mortgage market and would like to share experiences or offer pros and cons on the industry by writing  articles , you are welcome to free software that really simplify the writing and publishing process. To download the software, please clink on the “articles” link above.


About the writer


This writer is a loan officer specializing in commercial mortgage financing. My time spent in the mortgage industry dates back to 1992 and prior to that, in the real estate brokerage business which began in 1979. My career has been rewarding, but was not without challenges and yet there is no business I would rather do than commercial mortgage business. I occassionally write an article or blog and have created a few websites relating to the subject of real estate and the various financing methods used to purchase or refinancing it.

My articles are written under the name of Javeton, my pen name. The company I'm associated with in my professional capacity is United Northern Mortgage Bankers of Long Island New York. More information relating to the mortgage industry is published on other pages of this site which may provide answers to some real estate questions you may have.


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 It has occurred to me that in times of uncertainty people need a clear understanding of all available options so that their decisions are based on substantial information. It is always my preference to provide clarity on any issue I discuss or activities in which I participate whenever possible, thus the following article should serve to provide some answers to prospective purchasers of real estate. 


 Government Program Could Ease Sub-Prime Mess


Have you ever thought about alternative financing programs which may help to alleviate some of the problems that were created by the Sub-Prime dilemma? Utilizing a seldom-used, specialized government program could be the answer if the application is submitted properly.

The Section 203 (k) Rehabilitation Mortgage Insurance program was introduced by the FHA to enable homebuyers to finance the purchase of a house and the cost of rehabilitation with one mortgage only. For homeowners who have occupied their homes for at least one year and intend to continue occupancy, the program can be used to refinance the existing mortgage plus at least $5,000.00 in repair cost.

There are several other uses for the 203(k) program which will be covered later in this article, but right now the focus is on why it should be sought out and utilized in today's market. Make preparations to take advantage of this unique financing option that is seldom used or very often dismissed as being too complicated, too long-and-drawn-out, or too paper intensive.

The 203(k) program, one of many mortgage loans insured by the FHA (Federal Housing Administration) may be one of the best alternatives available to finance the purchase, refinance or rehabilitation of a home today because the risks associated with this loan are historically lower than those of a Sub-Prime (an unconventional reduced income/asset documentation and in many cases higher credit risk mortgage program) loan and the out-of-pocket costs are several thousand dollars lower than a FNMA (conventional) loan would be.

Start your search now for FHA-Approved lending institutions (this could include many banks, savings and loan associations or mortgage companies) in your area and inquire about their program requirements because different lenders may have slightly different underwriting criteria.

Although the program was originally designed to encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first-time home buyers and residents of disadvantaged neighborhoods where mortgages may be hard to get due to deteriorated values), present market conditions are indicative of the difficulties that existed in the early 90s when this program gained industry-wide popularity.

Learn about the many ways that the 203(k) program can be used to finance just about any property in today's market, especially with declining home values and the recently increased FHA loan limits. According to the “Eligible Activities” section of HUD's web page http://www.hud.gov/ the extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor to virtual reconstruction with a minimum repair cost requirement of $5,000.00.

A home that has been demolished or will be demolished for reconstruction is eligible as long as the existing foundation system remains in place.

 A residential property that also has non-residential uses (Mixed-use) is eligible as long as the non-residential portion does not exceed 25% of the overall structure; A multi-unit (Small apartment building with 5 or more units) is eligible as long as the building will be converted to a one-to four-unit structure.

Let your Realtor know exactly what kind of home you’re looking for just as you would have done if you were going to utilize a conventional or sub-prime loan program. Be confident that under the Section 203(k) program you have a much wider variety of housing options to choose from.

Here’s why: Providing you agree with the premise that most houses over one year old probably needs at least $5,000.00 worth of repairs pursuant to a contractor’s estimate, then 95% of one – to four – unit properties available for sale should qualify.

This means that if you decide on a specific home in a given area that you want to own, you should be able to aquire that home with Section 203(k) financing.

If however you cannot locate the right one or two unit home in the location of your choice and there is instead a three or four unit structure available, this program gives you the flexibility to go forward with the purchase and convert the three or four unit to a one or two unit and you'll have full supervisory powers over how your new home will be completed.

You control what your living quarters will look like. That’s one of the best features of this program. Any house can be made into your dream home. Literally!

Complete an application for a Section 203(k) loan when you're sufficiently satisfied that you have completed your own research because one of the great features about this program is that - in accordance with information published on the HUD page - “all persons who can make the monthly mortgage payments are eligible to apply” as long as that person intends to occupy the property as a primary residence.

Based upon this information one could conclude that borrowers who qualified for conventional mortgages would also qualify for Section 203(k) mortgage loans without the higher up-front costs, and those who qualified for sub-prime mortgages could simply gather up their earnings documents and apply, because the down-payment (3% minimum), although HUD did not cover this requirement on their page, and the credit issues - which may have been ligitimate reasons to seek sub-prime financing in the past - are quite manageable under this program.

When you consider the following improvements permitted with Section 203(k) financing, you can readily accept the premise that $5,000.00 in repairs should not be difficult to find in order to qualify the house for this program:

Structural alterations and reconstruction, modernization and improvements to the home’s functions elimination of health and safety hazards. Changes that improve appearance and eliminate obsolescence Reconditioning or replacing plumbing; installing a well and/or septic system

Adding or replacing roofing, gutters and downspouts, adding or replacing floors and/or floor treatments, major landscape work and site improvements, enhancing accessibility for a disabled person, making energy conservation improvements,

Notes:

HUD requires properties financed under this program to meet certain basic energy efficiency and structural standards.Applications must be submitted to the local HUD office through a FHA-approved lender
Repair costs estimates must be submitted by licensed, insured and – in some cases – bonded contractors unless the borrowers elect to complete the repairs by themselves. Special safeguards would be applied where borrower-completed repairs are concerned and HUD-Approved 203(k) Consultants must be engaged in order to complete the work write-up.

More onformation can be obtained at http://www.hud.gov/A HUD handbook, Rehab a Home with HUD’s 203(k), is available at website or by mail from HUD

This article was written by Tony "Javeton" Phillips. Tony is a mortgage professional specializing in commercial loans in the Northeast United States.

Next Post: Find out why the "Built-in" safeguards in the Section 203(k) program will work to prevent the kind of mortgage meltdown which we recently experienced.

Visit this www.c-loans.com for commercial mortgage info or email Tony at:  tony53p@hotmail.com or
highview22@comcast.net

 Javeton Tony