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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2007

How to Go Small-Balance

To find the best loan for your clients, follow the right steps with small-balance lenders

With many institutional and private lenders eager for small-balance commercial loans, programs are proliferating. Terms and service are improving, and the market is more transparent with considerable information online. Many mortgage bankers’ clients and prospects already know the advantage is on their side, and they look to an experienced broker for help in making the most of it.

To gain experience in the small-balance sector, know how to find the right lender. For efficient comparison-shopping among these kinds of commercial lenders, start by getting as much information as possible about the client and the property. Brokers should be sure to know the answers to the following questions:

  • What business are the prospective borrowers in?
  • What is the property’s intended use?
  • Is it a new purchase or a refinancing?
  • What is the business motivation for the loan? How does it fit with an overall strategy?
  • What is the property price or value?
  • What is the legal structure of the business (incorporated, limited-liability company, partnership, etc.)?
  • What documentation do the borrowers have (corporate tax returns, Internal Revenue Service Schedule C, personal tax returns, etc.)?

Because each lender has its own standards for loan-size range, property types, programs, terms and rates, this information will help to target the four or five lenders most likely to have interest in your clients. In most cases, brokers should talk to at least that many lenders to get a good range of possibilities. Lenders’ criteria can change often, so it’s up to brokers to stay in touch and keep up-to-date on their programs.

Most lenders analyze loan-size range and property type initially to screen for the type of loans they want to make. In the small-balance category, the low end of the loan range is usually $100,000, and the high end is $1 million to $1.5 million. Some programs consider loans as large as $5 million.

Lenders’ interest in various property types depends on their underwriting abilities and their specialization areas. Underwriting standards for typical small-balance-loan properties — auto-repair shops, restaurants, day-care centers and hotels, for example — are vastly different than the underwriting standards for office, industrial and retail operations.

Depending on their business strategies, lenders will change their targeted property types occasionally. If a lender is not underwriting the property type that your clients want to buy, the business-development officer should be able to refer you to another source.

Generally, brokers should work with lenders that have more than one loan type to offer. This will increase brokers’ ability to provide some customization for clients.

For example, you may want to look for lenders that offer investor loans as well as U.S. Small Business Administration loans. Working with lenders that can do stated-income loans in addition to fully documented loans also is an advantage.

Within the loan types, there may be options in terms of fixed and adjustable rates and length of amortizations. Loan-to-value ratios will be important for most clients. These will differ depending on the property type, whether the loan is stated-income or fully documented, and whether it’s a refinance or original purchase. Brokers also must be aware of prepayment penalties and balloon payments, if there are any. As with all sizes of loans, the best outcomes occur when lenders’ criteria fit well with the nature of the property and the borrowers’ business.

To set reasonable expectations for clients, brokers also should be familiar with the details of each lender’s process. Different lenders require funds at different times throughout the transaction, in some cases before the commitment letter or closing. As is the case with large-loan lenders, a small-balance lender should be able to provide a reasonable schedule for all parties.

When preparing to have the initial conversation with a lender, brokers should have at least the following information on hand:

  • Purpose of the loan;
  • Type of business the client is in; and
  • Business and personal tax returns.

After making this information available to the lender, brokers should expect the lender to provide a quote at the end of their conversation, if not soon after. The quote should include terms, conditions, options on terms and estimates of monthly payments in different scenarios. Once you have received information from the various lenders, you can lay out the alternatives and compare.

As with all sizes of loans, the lowest rate is not necessarily the best deal for your clients. Documentation requirements, terms and amortization periods can be equally important. Further, there may be room for negotiation.

Small-balance commercial loans can be big business and an important source of diversified revenues for mortgage originators who invest the time to understand the dynamic playing field. These days, lenders are eager to remain competitive by constantly reviewing rates and terms, expanding product lines and property types and improving processes to create lower costs and better terms. 


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