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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2017

The Search for a Better Loan

Nonbank solutions can fill the gap between bank financing and a bridge loan

The Search for a Better Loan

What do you do when you’ve outgrown the nest of your short-term bridge loan? It’s time to find a new home — one with a longer term and a lower interest rate. When seeking longer-term financing options for your client in anticipation of a small-balance bridge loan maturing, however, it can be difficult to find a lender that meets all of the borrower’s needs. 

By asking the right question, however, you may find that the solution for your client is somewhere in the middle. Private lenders are nimble and offer terms and interest rates that are between those offered by traditional banks and short-term hard money lenders.

Baseball legend Yogi Berra once famously remarked: “When you come to a fork in the road, take it!” Unfortunately, that advice isn’t very helpful for investors and small-business owners trying to decide between long-term take-out loan options to replace their small commercial bridge loan as it nears the end of its term.

Commercial loans under $1 million continue to grow in popularity as brokers across the country are discovering they can provide better counsel than the former Yankee catcher — even if they typically close larger transactions. Finding the right take-out option for a small-balance bridge loan comes down to a broker’s understanding of the borrower’s unique needs — and that broker’s ability to identify solutions for every fork in the road to a successful closing.

The borrower’s needs

Hard money loans haven’t always enjoyed a sterling reputation within the commercial mortgage industry, but experienced originators know that hard money is often “smart” money — smart for borrowers with time constraints, smart for business owners who have experienced recent credit difficulties and smart for those who need a short-term solution while they continue to plan for the future. The problem for many borrowers occurs when they no longer require the solutions their hard money loan provides.

Consider the investor with a credit score of less than 700 who had only a few days to secure the loan necessary to purchase an eight-unit apartment building before the owner sold to another bidder. A bank couldn’t act fast enough, and there’s no guarantee their loan committee would lend to a borrower with dinged credit. A hard money lender, however, would be able to fund the deal with a stated income, high-interest/short-term loan.

Of course, the investor’s needs may change over time. While they may still not be able to produce tax returns that prove their recent success, they may have been able to re-tenant the building and improve their credit score. When it comes time to refinance their mortgage, the investor will naturally want a reduced documentation, longer-term solution with a lower rate and the ability to take cash out of the existing mortgage. But if a broker doesn’t dig any deeper into the borrower’s specific needs, the borrower could end up with a new loan that ultimately stifles business growth.

The good news for brokers is that they don’t need to be small-balance experts to identify a borrower’s needs. They just need to ask the right questions. In the case of the investor with the eight-unit apartment building, the broker is more likely to identify an ideal solution by expanding on the following types of inquiries:

  • What length term is the borrower looking for?
  • How quickly does the borrower need to close?
  • How rate-sensitive is the borrower?
  • Is the borrower able to produce tax returns?
  • Does the borrower wish to avoid post-closing oversight by the lender?

Once a broker gets a clear picture of the borrower’s desires and current position compared to the beginning of the hard money loan’s term, it becomes easier to select the right take-out alternative.

Small-balance market

Borrowers coming out of a hard money loan can feel as though they must choose one of two options: refinance with another loan from the hard money lender or take a chance with a traditional bank. In fact, the industry is full of lender options that fall somewhere between those two ends of the spectrum. Some of the most active alternatives include agency lenders like Fannie Mae, life companies, online marketplace lenders and other types of nonbank organizations.

Mortgage brokers would be wise to identify those middle-ground alternatives that fall between traditional banks and the hard money options.

So where should mortgage brokers start their search for the best commercial take-out loan option? As usual, it depends on the borrower. Agency lenders and life companies offer attractive rates, but unless the borrower’s financial position has improved substantially during the short duration of the hard money loan, this type of funding may prove as elusive as the traditional bank option.

On the other hand, originators may find that certain nonbank lenders’ programs and rates fall somewhere between bank and hard money alternatives. While their interest rates are typically higher than those of traditional lenders, these nonbank options can offer increased flexibility and greatly reduced closing timelines. At the same time, they provide the fully amortized, long-term solutions that hard money lenders can’t match.

Some nonbank lenders provide additional options for investors with products like multifamily blanket loans. If a borrower owns multiple properties, they can refinance a consolidation of their investments, allowing them to take cash out of their real estate portfolio. This kind of solution can make it easier for investors to increase their capital or purchase another property, but it’s one they may not be able to find at a traditional lender. 

Novice small-balance originators can spot these types of commercial lenders by their rates and programs. Nontraditional lenders with rates close to 5 percent or lower are likely to behave like banks. Meanwhile, lenders with rates in the low teens typically fall into the hard money category. Brokers will find that the nonbank options with rates somewhere between 6 percent and 9 percent make up the middle ground — an area that makes sense for borrowers who have improved their financial situation but may still be classified as unbankable in the traditional sense.

Borrower matchmaking

Armed with both the borrower’s specific needs and a working knowledge of the small-balance commercial lending landscape, brokers should have all the information they need to help a borrower take out the hard money loan on their property. If the borrower has a credit score near 800, they may not have any trouble securing bank financing. If they want to take significant cash out of their existing mortgage, they may be a better fit for a more flexible nonbank alternative.

The true test of an originator’s mettle comes when a borrower’s needs don’t seem to match an obvious lender type. For instance, a borrower may want an attractive rate but no post-closing oversight, or a long-term loan that can be closed within 30 days.

When faced with these demands, mortgage brokers would be wise to identify those middle-ground alternatives that fall between traditional banks and the hard money options. Borrowers may never get everything they want out of their take-out loan, but they are far more likely to keep doing business with the broker who took the time to meet the greatest number of their needs.

•  •  •

A client with a maturing bridge loan represents a great opportunity for originators to display their ability to identify smart refinancing solutions that may not be obvious to their clients. By matching a borrower’s needs to a private lender offering loan terms and rates somewhere between the two extremes of a bank and a hard money lender, originators may actually be able to keep their clients out of that fork in the road altogether.


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