As published in Scotsman Guide's Residential Edition, November 2005.
When faced with a commercial loan, many residential brokers think, "It's too complicated"; "It takes too long"; "I won't make enough for the work I'll have to do"; or "I don't want to crunch numbers by hand."
Commercial lending has come a long way in terms of ease and loan programs. But while your residential competitors are learning how to increase their business and profit margins by closing commercial loans, you still might be holding on to outdated expectations and unrealistic fears. For example, did you know that these days, many commercial transactions don't take much longer to close than residential transactions?
It's time to put old attitudes to rest and look at the main differences -- and the similarities -- between commercial and residential trans-actions. Doing so, you'll see that you might not be out of your league after all.
Prequalification and underwriting
Residential qualification largely depends on borrowers' ability to pay the loan and on their creditworthiness. Scores also drive commercial transactions, for the most part. The property also must produce justifiable income and expenses.
In many cases, as long as the commercial property's net income (gross income minus expenses) can support the monthly mortgage payment, a borrower's debt-to-income ratio (DTI) may not be required, even on a full-doc loan. Note, however, that although borrowers' credit scores aren't the sole driving factor in qualifying for a loan, changes to borrowers' credit profiles during the process can break the deal, just as with a residential loan.
Although the math somewhat stops with a borrower's DTI calculations on a residential loan, a commercial broker also must figure out the property's income and expenses. In many cases, the broker also must calculate rent rolls and borrower taxes.
Many residential loans are alike, but you will rarely see the same commercial deal hit your desk twice. The uniqueness of each commercial file makes it difficult to expedite the prequalification or processing of commercial loans, especially using software or other technology. The residential world is lucky to have automated underwriting and mortgage software to help crunch borrower-oriented numbers from start to finish.
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