Tag loans

The most relevant commercial real estate lending basics offer far more than the chance to develop key professional relationships and avoid tenancy issues that often coincide with residential rental properties; it offers lucrative income potential that can dwarf more traditional forms of real estate investing. However, as any commercial real estate investors will tell you, the trick isn’t always finding a commercial property, but rather acquiring one of those ever-essential commercial real estate loans that let you bring a property into your portfolio.

While many lending principles apply equally to both residential and commercial real estate loans, there are some key distinctions (and tricks-of-the-trade) about the commercial real estate loan process that can save you time and money, if understood before plunging ahead.

COMMERCIAL REAL ESTATE LENDING BASICS

Commercial property loans, not unlike their single-family counterparts, are the foundation of a great real estate investment. The loans are just as important as the assets themselves—if not more so. At the very least, there are many types of commercial real estate loans which award savvy investors with unique advantages for their particular situations. That said, it’s not enough for investors to simply take the first loan that comes across their table; they need to mind due diligence and get to know the ins-and-outs of commercial real estate loans before making any decisions. The more an investor knows about their own CRE loan and how it applies to their situation, the better.

Individuals Vs. Entities

It is commonplace for residential loans to be made to individuals. However, commercial real estate loans are usually made to entities. Otherwise known as business entities, entities can represent a number of business: corporations, developers, limited partnerships, funds or trusts. It is common for entities like these to receive commercial real estate loans. If for nothing else, receiving a commercial real estate loan may even be why the entity was created in the first place.

Unlike a residential loan where money is given to borrowers based on things like their credit score, en entity won’t have a credit rating. Instead, the entity will have the owners guarantee the loan. That way, the owners of the entity will provide the credit history. In the event of a default, the owners will also give the lender an idea of who they need to recover from. 

For more information on not only how to get a commercial real estate loan, but also today’s commercial real estate lending basics, here are some answers to today’s most common questions on the subject.

WHAT IS A COMMERCIAL REAL ESTATE LOAN?

A commercial real estate loan, or “CRE loan” as it sometimes called, is a debt-based agreement set up between a borrower and financial institution in which the borrower uses funds to acquire commercial (non-residential) property.

One common misconception is to assume the terms “commercial loan” and “commercial real estate loan” are interchangeable. This is not the case. Commercial loans refer to the securing of funds that can be used for non-real estate purposes, such as equipment purchases or operating expenses. As an investor, your aim is a commercial real estate loan; it’s important when navigating the loan process to look for lending institutions that specialize in loans of this kind.

Types Of Commercial Real Estate Loans

Not unlike their single-family counterparts, commercial real estate loans can be found with countless terms and underwritings. The sheer volume of available commercial real estate loans is to help buyers acquire deals with favorable terms and rates. There is practically a loan for every situation a commercial real estate investor could think of. Let’s take a look at some of today’s most popular commercial real estate loans:

• SBA 7(a) Loan For Commercial Real Estate: As their names suggest, SBA 7(a) loans are backed by the U.S. Small Business Administration. While there are several types of SBA loans, this particular one is specifically tailored to those who want to purchase or refinance owner-occupied commercial properties up to $5,000,000.
• CDC / SBA 504 Loan For Commercial Real Estate: Also backed by the U.S. Small Business Administration, CDC / SBA 504 loans are best suited for those who need more than the $5,000,000 offered by SBA 7(a) loans.
• Traditional Commercial Mortgage: Traditional commercial mortgages are offered through institutionalized banks and lenders. Traditional loans tend to range from five to 20 years, but are great for those with good credit and in need go longer loans.
• Commercial Bridge Loan: Commercial bridge loans help investors secure immediate financing, giving them a chance to search for a more long-term solution in the interim. Bridge loans help investors bridge the gape between when they need immediate funding and when they can find a more permanent solution.
• Commercial Hard Money Loan: Commercial hard money loans are reserved for those with a need for short-term loans. They tend to come with higher interest rates, but the price comes with a benefit. Since hard money lenders aren’t associated with an institutionalized bank, borrowers can receive the money fast, and without a perfect credit score.

HOW LONG ARE COMMERCIAL REAL ESTATE LOANS?

Commercial real estate loans can be as long as 30 years or as short as a few months. But generally they’ll have a term, on average, of between 5-30 years.

This doesn’t mean, however, that you necessarily will be paying a monthly commercial mortgage for the full term of the loan. Unlike residential loans, which are fully amortized—or have the balance of the loan broken up in regular, monthly payments—commercial real estate loans often have a set monthly payment period (usually the first five to seven years), and then require a large balloon payment at the end.

This can be either a benefit, or catastrophe, for commercial real estate investors. It’s vital you mind your due diligence to ensure the terms of a commercial real estate loan fit in with your overall real estate investing needs.

CRE Loan Repayment Schedule

The repayment schedule of a commercial real estate loan can last anywhere from five years to 20 years. There are, of course, exceptions, but that seems to be the industry standard. It is worth noting, however, that the amortization period is traditionally longer than the loan itself. Not unlike a residential loan, a commercial real estate loan’s rate can change depending on the length and amortization of it. Investors with a good credit standing may have ore negotiating power than those without.

WHAT ARE COMMERCIAL REAL ESTATE LOAN REQUIREMENTS

There are universal criteria that come into play when approaching a lender about a loan, no matter what type. But when applying for a commercial real estate loan, it’s vital you focus on these key CRE loan requirements:

• Credit History: This has less to do with your credit score, which should be at least 680 or higher, and more to do with ensuring your credit history doesn’t contain recent tax liens, foreclosures, and recent bankruptcies. Otherwise you might find the commercial real estate loan process quite difficult.
• A Low Loan-To-Value (LTV) Ratio: LTV ratio calculates the amount of equity, or collateral, a borrower has in a given property by dividing the loan amount by the appraised value (or purchase price) of a property. (Example: If your loan amount is $97,000 and the property is worth $100,00, your LTV is 97%.) Home buyers securing a residential loan can have an LTV as high as 100%, though usually somewhere in the 80-97% range is more common. Investors seeking a commercial real estate loan will most likely have to sit somewhere in the 65-80% range, at a minimum.
• Business Entity: This is a common mistake many first-time commercial real estate investors make when applying for a loan. But having your business entity set up, before filling out that application, can sometimes make a huge difference to lending institutions.
• Organized Paperwork: This is another overlooked area of the loan application process for many first-time commercial investors. But making sure that every document (and packet) you send to a lender is organized, tidy and doesn’t set off “alarm bells” can sometimes make the difference between getting rejected, and that large commercial real estate loan you need to make your investing dreams come true.
• Online Marketplace Loan: Otherwise known as a “soft money” loan, an online marketplace loan will match borrowers with private investors who help finance commercial properties for a return. These loans will come with an interest rate between conventional banks and hard money lenders, which people often call a “soft” loan. These loans are traditionally short for commercial real estate, as they can last from six months to a few years.
• Joint Venture Loan: In the event a single entity isn’t able to secure a loan by itself, it can join forces with another entity. By seeking a joint venture loan, the loan will be given out based on two entities instead of one, effectively making them partners, but also making it easier for entities who would otherwise not qualify.

Do CRE Loans Have Fixed Or Variable Interest Rates?

This depends on the type of commercial real estate loan you secure. (There are numerous kinds of CRE loans, including a traditional commercial mortgage, bridge loan, hard money loan, and joint venture loan, etc.)

As a general rule, a commercial real estate loan will most likely have a variable rate — that large amount of money borrowed comes at a cost — and be considerably higher than residential real estate loans (sometimes as much as two-three percentage points).

CAN YOU GET A COMMERCIAL REAL ESTATE LOAN WITH NO MONEY DOWN?

It is entirely possible to get a commercial real estate loan without putting any money down. However, it is important to note that the less an entity puts down, the harder it will be to qualify. That said, a down payment is not necessary; there are a number fo different financing methods to use instead.

For example, if an entity can’t come up with the money, they can perhaps partner with another entity and form a joint venture. In that case, the other entity could front the money. Another way to get away without putting any of your own money down is to get a bridge loan. Bridge loans can help investors secure short-term funding for a down payment so that they may negotiate a longer-term loan through a more traditional lender. 

HOW LONG WILL IT TAKE TO GET A COMMERCIAL REAL ESTATE LOAN?

As the commercial loan brokerage Whista detailed in a column recently: “Everyone is going to tell you it should take about 30-45 days to get a commercial loan. Not in this lifetime…if your broker or lender is being honest with you, they will tell you to expect about 45-120 days.”

This doesn’t mean there won’t be exceptions; there may very likely be situations in which you’re able to reduce this commercial loan process considerably. But if your investing strategy depends on a quick timeline, go in knowing you may need to be flexible until you hear back from a lending institution.

HOW TO CALCULATE COMMERCIAL REAL ESTATE LOANS

No calculation can be made until a number of metrics are already in hand. That said, to calculate a commercial real estate loan, an entity will need to obtain the possible loan amount, interest rate, amortization term, and any balloon payments if applicable. With all of the numbers in hand, simply visit an online mortgage calculator and fill in the blank fields. 

HOW TO CALCULATE LOAN-TO-VALUE RATIO

As the name suggests, a loan-to-value ratio gives entities a way to measure the value of a loan against the value of a property. In order to calculate the loan-to-value ratio, or simply LTV, divide the amount of the loan by the property’s appraised value or its purchase price, whichever is lower. 

SUMMARY

Learning today’s commercial real estate lending basics isn’t as hard as many would assume, but they do require far more diligence, preparation, patience, and paperwork then a residential mortgage loan; that’s because of the large amount of funds being requested. It is a good to remember that commercial real estate financing is more complicated and logistically challenging; they have to be due to the increased risk. There are many moving parts—both legal and financial. However, if you’re able to stay persistent and focused through the process, you might find a life-changing transaction just around the corner.

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Key Takeaways

• Understanding how to finance commercial real estate is one of the first steps for investors looking to break out of the residential industry.
• With a firm grasp on the commercial real estate financing basics, investors should have a slid commercial foundation to build off of.
• Commercial real estate loans are a bit more complex than residential loans, but they are necessary for larger projects further down investors’ careers.

Mortgage rates went up slightly this week — an indication that mortgage firms are changing their lending operations in response to the coronavirus.

The 30-year fixed-rate mortgage averaged 3.33% during the week ending April 16, representing an increase of two basis points from a week ago, Freddie Mac FMCC, reported Thursday. 

The 15-year fixed rate mortgage increased six basis points to an average of 2.86%. The 5-year Treasury-indexed hybrid adjustable rate mortgage, meanwhile, fell six basis points over this last week, averaging 3.28%.

Mortgage rates rose this week in spite of the 10-year Treasury note’s yield TMUBMUSD10Y, 0.602% , which fell in response to major volatility in energy markets globally. Historically, mortgage rates have roughly followed the direction of long-term bond yields, but that relationship has weakened amid the coronavirus crisis.

“While investors kept bond rates at historic levels under 1.0 percent, mortgage rates did not follow on a downward arc due to the fact that banks and lenders are pricing loans for the higher risk they are assuming by raising FICO FICO, -0.53% scores and down-payment requirements,” said George Ratiu, senior economist at Realtor.com.

Banks are imposing stricter standards for new borrowers

The rise in rates also comes as lenders are rethinking who they will lend to amid the coronavirus pandemic. “Lenders are announcing more stringent underwriting requirements and exiting some products completely,” said Tendayi Kapfidze, chief economist at LendingTree TREE, +2.38% . “This means many potential homebuyers and those looking to refinance will have greater difficulty accessing credit.”

JPMorgan JPM, +0.05%, one of the country’s largest lenders, has raised the requirements borrowers must meet to be eligible for most new home loans, Reuters first reported last week. Customers will need a credit score of at least 700 to qualify and must have saved funds equivalent to a 20% down payment. 

Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s mortgage business, told Reuters the changes were made “due to economic uncertainty” so that the bank could “more closely focus on serving our existing customers.”

Other mortgage companies have followed suit in tightening certain requirements. And Flagstar FBC, +3.71% which was the 10th largest mortgage lender in the country by total loan volume as of 2018, has raised the minimum credit score for new FHA, VA and USDA purchase loans to 680. For cash-out refinances, the bank now requires that borrowers have at least a 700 credit score.

Depending on the type of loan, that equates to an increase in the minimum credit score of between 20 and 40 points, said Kristy Fercho, executive vice president and president of mortgage at Flagstar Bank.

“JPMorgan is one of the top originators in the market, and they in some ways set the standard for what other lenders are going to do,” Fercho, who is also the vice chairman of the Mortgage Banker Association, said. “And so you pay attention when JPMorgan makes changes like that.”

If a lender doesn’t make changes after one of the largest companies in the industry does so, Fercho said, they risk the possibility of attracting borrowers in worse financial shape who might be more likely to go into default.

‘JP Morgan is one of the top originators in the market, and they in some ways set the standard for what other lenders are going to do.’— Kristy Fercho, president of mortgage at Flagstar Bank

The Federal Housing Finance Agency this week announced that Fannie Mae FNMA, +2.28% and Freddie Mac could buy loans in forbearance — a sign that lenders have been closing mortgages, only for borrowers to soon need to stop making payments because of income loss related to the coronavirus.

Beyond imposing stricter standards in terms of credit scores and down payments, mortgage lenders have taken other steps to prevent the possibility of making risky home loans. 

As part of the underwriting process, lenders are required to verify a borrower’s employment. Typically that’s done around 10 days before the loan is closed, but now some lenders are moving toward doing this verification on the day of closing in response to the tumultuous economic landscape.

“People are losing jobs at such an alarming rate across America that we want to verify the day of closing that they are still employed,” said Mat Ishbia, president and CEO of United Wholesale Mortgage.

Also see:These U.S. housing markets are most vulnerable to a coronavirus downturn

Additionally, United Wholesale Mortgage and Wells Fargo WFC, -1.00% are putting into place different reserve requirements for self-employed borrowers.

Lenders stress that these changes are temporary, and time will tell how quickly mortgage companies return to business as usual. “You just want to make sure that you’re setting people up for success so that they’ll be able to stay in that home,” Fercho said.

https://www.marketwatch.com/story/mortgage-rates-go-up-slightly-as-some-lenders-tighten-restrictions-on-who-qualifies-for-a-home-loan-2020-04-23?siteid=yhoof2&yptr=yahoo

NEW YORK (Reuters) – JPMorgan Chase & Co <JPM.N>, the country’s largest lender by assets, is raising borrowing standards this week for most new home loans as the bank moves to mitigate lending risk stemming from the novel coronavirus disruption.

From Tuesday, customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value.

The change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market, after measures to contain the virus put 16 million people out of work and plunged the country into recession.

“Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers,” Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s home lending business, told Reuters.

The bank was the fourth largest U.S. mortgage lender in 2019, according to industry publication Inside Mortgage Finance.

The changes should help JPMorgan reduce its exposure to borrowers who unexpectedly lose their job, suffer a decline in wages, or whose homes lose value. The bank said the change will also free up staff to handle a surge in mortgage refinance requests, which are taking longer to process due to staff working from home and non-essential businesses being closed.

Refinancing requests jumped to their highest level in more than a decade last month as average rates on 30-year fixed-rate mortgages, the most popular home loan, fell to near record lows, according to data from the Mortgage Bankers Association (MBA).

JPMorgan would not disclose the current minimum requirements for its various mortgage products, but the average down payment across the housing market is around 10%, according to the MBA.

The new credit standards do not apply to JPMorgan’s roughly four million existing mortgage customers, or to low and moderate income borrowers who qualify for its “DreaMaker” product, which requires a minimum 3% down payment and 620 credit score.

The U.S. housing market had been on a steady footing earlier this year, but with a deepening recession and would-be home buyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector.

The residential mortgage market is already under strain after borrower requests to delay mortgage payments rose 1,900% in the second half of March, Reuters reported.

The National Association of Realtors last month said home sales could fall by around 10% in the short-term, compared to historical sales for this time of year. A Federal Reserve March consumer survey said home prices were expected grow 1.32% over the year, the lowest reading since the survey began in 2013.

https://www.yahoo.com/finance/news/exclusive-jpmorgan-chase-raise-mortgage-221128934.html