I want to use commercial loans for multi-families is this good?

Question

I have been finding issues with being able to get a residential loan due to my DTI ratio being close to 41%, with commercial lending can I avoid this qualification? If I decide to use this type of lending what other types of qualifications can I avoid, what are the pitfalls with this kind of lending?

Karen Schimpf · Answer

@Benjamin Allen

The reason investor use Commercial Financing for SFR (4 units) is because they either have used up Fannie Mae and Freddie Mac financing or the DTI is too high.  SFR commercial lending will typically look at sellers 3 years of operating statements, plus ytd operating statements, to determine if the loan can debt service the mortgage.  The typical loan to value on SFR commercial financing is 75% ltv.  What the underwriters will look for is the loan amount,loan to value, the cash for the down payment, around 9 months of reserves,cash flow, will the mortgage be able to debt service, if you have minimum of 680 credit scores (preferably 720), instate or out of state borrower, and etc. for the better rates. Commercial rates are higher than SFR Fannie Mae and Freddie Mac.

If you are talking about Commercial lending for 5 units and more, the loan to value usually is 75% unless everything is very strong than it can go to 80% LTV. Usually going to the 80% LTV the lenders prefer the amount typically  starting at $500K (if not higher).  Loan amount is critically in 5+ units because many lender prefer the loan amount above $1MM.  Commercial lender's category is broken down by loan size and market size; $250K under is the least desirable, $250K+, $500K, $1MM, $3MM, $10MM+. Market is top markets, mid markets and small markets.  Some commercial lenders consider a population of 20K small. If you ever here the term small balance lender, it means for loans that are $1MM plus.

Commercial lending is a different animal than residential, but do not let that scare you because the rewards of a commercial unit for an investor is a lot higher = $$$$$.  Like anything, you just have to learn it.

Parker Fairfield · Answer

This gets my "Thread of the Day" vote! Excellent questions, and fantastic replies by @Karen Schimpf!

Charles Kennedy · Answer

Although already specified that mez=mezzanine debt, I'll elaborate a bit more. Mezzanine, literally means another floor... from google "a low story between two others in a building, typically between the ground and first floors."

Now a typical commercial lender will not exceed 75% Loan-to-cost (LTC), so you are required to post 25% equity with yourself or a JV partner. Many people don't have the equity to do so and will seek "mezzanine financing", to pick up another 15% of the cost (you know only have to put up 10% equity, YAY!). Now this mez financing is further back in the capital stack, but still before equity (meaning if things go bad (project fails), they get paid back AFTER the senior/traditional debt, but still before equity). Like all investments, the mez lender will want to be compensated for this risk and you will have to pay a much higher interest rate on these loans. At large banks you often see senior debt in the mid 3% range for high quality properties with mez debt around 11% for an all-in rate for something like 5%.

I also believe you must let your senior debt lender know if you are going the mez route.

Finally, let me finally note that I personally wouldn't recommend being so highly levered. There is a reason the banks/lenders don't like when you have a very high LTC/LTV, because it means you have higher debt service payments and if you lose a tenant for a long period or time or the market takes a turn for the worst, you can easily default. However, if you have less leverage (say with only 65% debt), you payments are much lower and you can withstand a downturn.

Good luck,

Karen Schimpf · Answer

@Kerry Baird Like you, I had an interest in learning financing so I could achieve my goal of owning apartment buildings. That is why I got into the lending industry 20 years ago.

There are college courses and degree programs depending on how much you want to learn.  Check out courses at  Cues.org, Graduate School of Banking at Colorado, and CENTER FOR FINANCIAL TRAINING (ctfnow.org).

You also might do a Google or Youtube search for finance schools.  I love Youtube.  Youtube can teach you how to build a car so I'm sure there is something on there that can teach about commercial finance.

I subscribe to commercial newsletter like CoStar Advisor, Real News, Scotsman Guide, Mortgage Daily etc.   You might also want to read the book, "Commercial Mortgages 101" by Michael Reinhard.  This will give you an idea of how to put a package together so an underwriter will approve your loan.

Lastly, direct industry experience.

Hope this helps.

Karen Schimpf · Answer

@Benjamin Allen For SFR Commercial Loan, the loan amounts range from $75,000 to $2,000,000.00 dollars so the minimum purchase and appraised value must be 108,000+.  The loan to values up to 70%, 6 mos of PITI cash reserves, minimum of 650 credit score.  The debt service is 1.2 so will need the property's tax returns and operating statements.  The terms are 3 years with a 30 year amortization with a step down prepayment penalty.  The Commercial SFR Program will not compete with the Residential Fannie Mae or Freddie Mac rates and terms. Once again, go Freddie Mac and Fannie Mae first for the better rate and term, (if you can qualify).  I would need a loan package to determine the rate.

Obviously, I am a commercial lender and my strength are commercial and SBA loans.  If you had a $350K apartment loan amount I have the potential of getting you a very competitive rate on the Commercial Fannie Mae/Freddie Mac.  The bigger loan amounts, get the longer terms, the better rate and non recourse.

Kerry Baird · Answer

@Karen Schimpf, do you have a favorite resource for learning commercial? Book? Course?  Thanks~

Benjamin Allen · Answer

Thank you Karen Schimpf You have given the best answer, this explains so much for me. My main problem is that my DTI is too high right now because of all the mortgage debt, I have no other debt beside mortgages. I am trying to use a Portfolio Loan for an investment property and usually either another Portfolio Loan or secondary market loan for the 2nd property I pick up this year and every year after, but I'm not sure I can just keep doing that. I'm just wondering when I start getting into commercial lending for SFR, are the main sticking points for banks, cash reserves, the value of the property, and down payment in a board sense? Thanks again for an the response

Benjamin Allen · Answer

OK, thank you  Chet Mazur. I guess I will need to sit down with a loan officer at each bank to get more clarity

Chet Mazur · Answer

mez=mezzanine debt. To me a MF loan is a type of commercial loan. How you are qualified varies bank to back.

I want to use commercial loans for multi-families is this good?

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