Over the past few years, United States homeowners
have enjoyed easier access to mortgage capital
than ever before. As the mortgage banking industry
has become increasingly more comfortable with
consumer credit risk, residential mortgage lenders
have been able to offer an abundance of innovative
loan products, including high Loan-To-Value, Interest
Only, Option ARM, alternative doc, and sub-prime
loans.
But while the residential mortgage industry
has trended toward easier and more attractive
credit products, the commercial property investors
have found it increasingly more difficult to qualify
for a mortgage.
Why the incongruence? First and foremost is
the very nature of the primary institutions that
provide commercial
mortgage loans —commercial banks. Historically
seen as the source of credit for commercial real
estate investors, commercial banks tend to be
rather conservative, risk averse institutions.
And, since they are highly regulated by government
agencies, banks are not afforded the luxury of
adopting the flexible underwriting standards prevalent
in residential lending. The result is that high
LTV, interest only, and sub-prime products are
generally not found in the commercial banking
industry.
In addition, commercial banks have had difficulty
adapting lending programs to the red hot real
estate market. In today’s market, where
investors are purchasing rental properties at
historically low rates of return in hopes of property
or rent appreciation, it is increasingly less
likely for a property to generate enough cash
flow to sufficiently cover the mortgage payment.
The problem for commercial banks is that when
assessing whether or not to make a loan, they
will focus only on the cash flow of the property
itself, rather than the financial strength of
the individual who owns the property. Most banks
require the net rental income, generated by a
property, to exceed the mortgage expense by more
than 20%. If this condition cannot be met, the
bank is forced to either turn down the loan or
lower the loan amount to an unacceptable threshold.
This can be extremely frustrating for investors
who can demonstrate good credit, a high net worth,
and/or a steady income stream from other sources.
They may wonder – and rightly so - why qualifying
for their residential loan was such a breeze,
yet they are declined by a bank for a commercial
loan.
The solution for commercial real estate investors
who do not meet the bank’s strenuous conditions
is to find alternative, non-bank commercial lenders
who take a more pragmatic approach to qualifying
borrowers.
In recent years, alternative, non-bank commercial
lenders such as Commercial Loan Lenders, have
emerged as industry leaders. Commercial Loan Lender’s
Commercial mortgage program considers the credit
strength of the property owner, instead of simply
analyzing the cash flow of the property in isolation.
In addition, lenders such as Commercial Loan Lenders
offer borrowers attractive loan terms not found
at traditional banks, including 90% LTV, Interest
Only loans, 30 year terms, and no balloon requirements.
The result is a commercial mortgage product that
feels just like a home loan—something commercial
borrowers have sought for a long time.
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