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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2016

Stitched With Small Lending

With efficient administration, small-balance loans have an important place in the patchwork of financing opportunities

Stitched With Small Lending

Just as small commercial projects are the thread of thriving communities, the small-balance loans that fund them are excellent material to supplement a healthy origination business.

Commercial and residential mortgage brokers often are confused by the term “small-balance” as it applies to commercial loans. What are they? Are they U.S. Small Business Administration (SBA) loans or some voluminous commercial creature with little return?

The answer to that question is “no.” Small-balance commercial loans, when underwritten by an experienced lending partner, are a gold mine. They are loans to businesses in your local community; businesses that you interact with, shop at and whose owners you know by name.

These small-business owners make up the fabric of our towns, cities and communities. They also are the ones most forgotten by today’s banks and conventional lenders. Thus, they represent a niche with potential, a segment of the market with pent-up demand — one that you as an experienced mortgage originator can service with your lending expertise.

Commercial mortgage loans valued between $25,000 and $1 million are considered small-balance. Loans in this size range are a great supplement for an originator because they require far less paperwork and documentation than larger transactions. They also close more quickly, usually in less than three weeks, meaning they are a great way to supplement cash flow.

Just think how nice it would be to know that a good part of your fixed overhead can be paid by closing one or two small-balance transactions per month. With the potential to earn 3, 4 or even more points per loan, small-balance transactions are very profitable. Paired with the right lending partner, you can leverage your contacts and your time in a way that can enhance your profitability and your reputation. By adding a small-balance product to your offerings, you also can better serve your referral network and local Realtors, all while serving your local community.

Find the right lender

Adding small-balance lending to your product offerings can dramatically increase your earnings. To accomplish this goal, however, you should be smart about it. You should select a lending partner that will respect your time and your referral sources’ needs.

Start by finding experienced lenders that have years of experience servicing the small-balance market. Watch out for start-ups or re-ups. Avoid companies that don’t retain a portfolio or service customers after the transaction is funded. If there is an issue later on, you want to know with whom you and your client can talk to resolve the problem.

In addition, make sure you link up with a lender that respects your time and the value of your referral network. You have large, involved transactions that you are working on. You can’t get bogged down in smaller transactions.

You must assure that the lender’s team handles the loan processing. They should place the third-party reports, clear the title and keep you in the loop. They also need to know that delivering what they commit to is critical for you to maintain credibility with your referral sources. Letters of Intent are not commitments, so don’t get blindsided when a lender changes the terms after a letter of intent is issued — and your client has already spent money on third-party reports. You need a firm commitment before you let your client spend money. You must demand that all underwriting is completed before your client commits funds out-of-pocket.

Small-balance commercial lenders underwrite loans with the big picture in mind.

Small-balance transactions are not SBA loans. They are not cookie-cutter mortgages. They require a lender that will listen to the story and is willing to look past minor credit issues and understands cash flow beyond tax returns. These things come from a lender that has a dedicated staff, sales people and underwriters who will talk to you and your customer — lenders that will listen understand and underwrite outside the box.

Know your customer

Knowing where your borrower falls on the credit spectrum also is crucial, because this will allow you to place them with the right commercial lender. If you have a borrower with recent late payments, judgments or collection accounts, or if the borrower’s credit score is falling, hard money lenders are generally the right choice. These lenders are lending based strictly on the collateral and not the borrower’s ability to repay the loan.

Not all nonbankable borrowers have to go to hard money lenders, however. There are alternatives. If your self-employed clients have imperfect credit scores, a small-balance commercial lender could be a great solution. These lenders often offer fixed-rate and fully amortizing loans at better rates than their hard money counterparts, and they will listen to your borrowers’ stories regarding past credit issues. Because they understand the challenges small-business owners face, small-balance lenders can properly underwrite loans for the self-employed borrowers who have put their credit issues behind them.

Small-balance commercial lenders underwrite loans with the big picture in mind, determining each borrower’s ability to make payments along with the strength of the collateral. Keep this in mind and remember that you can secure better loan options for a nonbankable borrower as long as you understand the borrower’s credit history and can find a lender that can address the individual’s unique situation.

Opportunity awaits

Unlike larger commercial transactions, and even QM residential loans, small-balance commercial transactions do not require a great deal of income analysis. There is no debt-ratio coverage and no spreadsheets to complete. These time-consuming, paper-intensive requirements have been eliminated by small-balance lenders and replaced with alternative methods of determining borrowing capacity.

For you as a loan originator, this means that the right lender can keep your work to a minimum and let you leverage your time finding the next deal. The more you can transfer work to the lender, the more time you have to spend on your core business of larger transactions. This also means that the return you make on your time is quite attractive.

Unlike SBA loans, small-balance transactions do not have a fee cap. You can charge what the market and your customer will bear. This doesn’t mean that fees can be exorbitant; in fact, many lenders limit fees to 5 to 7 percent of the loan amount. What it means is that you can charge a reasonable fee for your time and effort. You can build in a yield spread and earn part of your fee from the lender. This is a great way to supplement the income you earn from your core product offerings.

• • •

Adding small-balance transactions to the commercial, or even residential, lending you do is easy. Find the right partners, understand their products, tap your existing referral sources and watch the fee income roll in.


 


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