Monday, August 29, 2022

Can I Get A Commercial Loan With 20% or Less Down

 Question: "I have about 10–15% to put down, but I’m afraid they won’t qualify me because I don’t have the 30%. I also want to use the properties leases as additional income to help swing my DTI in my favor. Is there a way to accomplish this? Or should I just focus on getting a cheaper property with cash?"

In the commercial world, it’s tough to buy with less than 20% down. BUT not impossible. 

Commercial loans are appraised and underwritten differently from smaller residential income properties (1–4 units). Lenders do not use debt-to-income ratios (DTI).

Both the appraisal and the underwriting will be done largely on capitalization of income. First, let’s define a capitalization ("cap") rate for those readers who may not be aware of the term.

When we evaluate income property, we first reconstruct the income and expenses. We’ll look at scheduled market rental income and subtract a reasonable market vacancy factor. The resulting number is called Effective Gross Income. Next, we’ll reconstruct operating income for the property. We will include a management fee, even if one is not currently being charged, and standardized factors for repairs and replacements. We’ll subtract those expenses from the Effective Gross Income to get Net Operating Income (NOI). The NOI does not include depreciation or debt service.

We calculate the cap rate by dividing the NOI by the property’s value and expressing the quotient as a percentage. Thus, a $1 million property with $80,000 NOI would have a cap rate of 8.0% (80,000 / 1,000,000 = .08 = 8.0%).

An appraiser will use a market cap rate for the type of building he is appraising and work backward, dividing the NOI by the cap rate. A building with NOI of $100,000 in an area where the typical cap rate is 7.5% would have a derived value of $1,333,333 (100,000 / .075 = 1,333,333).

The lender will base their loan partly on "debt service coverage." This means that they’ll expect a certain amount of cash flow left over after the debt service. They will use the calculated NOI to arrive at that number. If their guidelines specify debt service coverage of 1.2, that means that our building with NOI of $100,000 would support annual debt service of $83,333 (100,000 / 1.2 = 83,333). Working backward from the annual debt service and using the loan terms available, we’ll get the size of the loan (with some possible limitations).

Annual debt service of $83,333 represents a monthly payment of $6,944. If the lender is willing to make a loan with a 5% interest rate amortized over 25 years, you’d have a loan of $1,188,000 (trust me on this. I know things). So working backward to check our work, we divide the $83,333 annual debt service into our NOI of $100,000, and we get 1.2.

These kinds of loans are almost always "portfolio" loans. This means that the lender will not sell them on the secondary market (Fannie Mae and Freddie Mac are among the largest buyers of residential mortgages), but will hang onto them. Because of this, they have the flexibility to set their guidelines. They will typically do two additional things with their loans: they will extract a personal guarantee, and they will have a maximum loan-to-value ratio (LTV) for their loans. If their maximum LTV is 80% (which is typical), the loan we’ve just calculated would be good for a property valued at $1,485,000 (1,188,000 / .80 = 1,485.000). If the property you are considering has a price lower than that, let’s say $1,300,000, the lender is likely to approve you for $1,040,000–80% of the purchase price. If your personal financials look good, some lenders may be willing to extend more credit. They might look at "cross-collateralization," for example. This means that they would encumber other properties you own to secure the excess. They may also make the loan "recourse." This means that in the event of foreclosure, they would have the right to come after you personally for any shortfall if the property should not bring in enough cash at sale to clear the mortgage and costs of foreclosure. This personal guarantee can make refinancing or selling those other properties difficult.

The primary things to keep in mind with commercial financing is that the lender is looking very hard at the economic viability of the property when approving a loan.

I hope this was useful.

Thank you for visiting my blog, please leave a question or comment and come back again soon. 

Roxy Redenbaugh, Broker
Sr Mortgage Consultant
Residential and Commercial
The Greatest Compliment I Can Receive Is A Referral From Friends, Family, and Business Associates,
NMLS#269926 Company NMLS#1930219

Friday, July 8, 2022


 For everything we hear about outdoor air quality, few homebuyers seem to be overly concerned about the air they may breathe inside the home they’ve just submitted a purchase offer. Most Americans will spend at least one-third of their time every day inside their house. So if the air they breathe during that huge chunk of their lives is unhealthy, it has the potential to be a really big deal.

According to a Redfin article by Dylan Clark, many indoor air quality problems are difficult to inspect for or gauge accurately because they lack easily definable metrics. “This leaves uncertainty regarding things like mold, formaldehyde, pets, rodents and other peculiar odors, he says. “One indoor air quality question that comes up a lot on older homes, which is a bit more precise to measure, is asbestos.” That means if you're a homebuyer, homeowner or remodeler, it’s wise to learn all there is to know about asbestos.

Asbestos is a mineral that naturally occurs in the earth. Because it contains properties that make it an excellent and inexpensive fire retardant, it was added to a number of building products back in the 1940s all the way through the 1970s, including insulation, floor tiles, ceiling tiles, heating duct tape, boiler pipes, cement siding, textured ceilings, and even the glue used under flooring.

The reason you hear remodelers on HGTV shows shriek with horror when they find asbestos materials during a house renovation, however, is because it can not only be toxic when the abrasive fibers get inhaled into the lungs causing damage to lung tissue, but remediation can also be a big hit to their renovation budgets.

So how do you determine if asbestos is present in your house? For one, you can hire an industrial hygienist or an environmental lab to perform an evaluation of the house, according to Clark. “These contractors should follow a thorough testing protocol and will often take more than a dozen samples from the building. Once you have the results, you should know what materials contain asbestos, and most labs will also provide a protocol for remediating (safely removing) these materials. You now have data.”

Then there question of what to do. In older homes many of the materials that contain asbestos are already encapsulated and can’t become airborne, so you can rest easy — nothing needs to be done. “The biggest risk posed by asbestos in buildings is during a remodel or renovation to an old house,” says Clark. “This is when the asbestos-containing materials get damaged and aerosolized and people working or living in the house are at risk of exposure.”

State laws often mandate that homeowners and their contractors test for asbestos before any construction or renovation project if a house was built prior to 1977, when the substance became banned for public health reasons. Remediation must be done by licensed abatement contractors before starting demolition work.

Homebuyers tend not to test for asbestos as part of their due diligence when buying a house for a number of reasons, including no immediate plans for renovations. If there are no real plans to potentially disturb the asbestos products a house may contain, you may to test the house later when you have work done. But if you are the new owner of an older home who instantly plans to take down interior walls, rip out old drywall, lath, and plaster, you need to plan a budget for lead and asbestos identification and remediation. “If you have time to do this evaluation before buying the house, that is great,” says Clark. “The more data up front, the better.” Often, however, home buyers have short timeframes to complete their inspections.

It should be noted that home inspectors generally are not certified for asbestos inspections. While many home inspectors report on the presence of building materials that are likely to contain asbestos, their findings should not be confused with a comprehensive asbestos identification inspection.

Thank you for visiting my blog, please leave a comment or question. 

Roxy Redenbaugh, Broker
Sr Mortgage Consultant
Residential and Commercial
The Greatest Compliment I Can Receive Is A Referral From Friends, Family, and Business Associates,
NMLS#269926 Company NMLS#1930219

Source: Redfin, TBWS 

Thursday, July 7, 2022

FHA Loans And First-time Homebuyers

 Question: Are FHA loans only for first-time home buyers?

Not at all. The Federal Housing Administration was formed in 1934 to provide financing for low- and moderate-income buyers, but there is no maximum income for buyers or requirement that they are first-time buyers.

FHA has become a useful choice for many buyers whose credit situation might make conventional financing more difficult and more expensive.

FHA loans today require a minimum down payment and mortgage insurance for the life of the loan. Although it is not a first-time buyer program, it is very popular with these buyers, partly because many communities offer down payment and closing cost assistance for qualified first-timers, whose income falls beneath certain limits.

FHA is also an excellent choice for those buyers whose credit scores are at the lower end of the scale. Whereas conventional loans require a minimum FICO score of 620, FHA accepts scores much lower. Contact your lender for specific terms or to apply for an FHA loan.

FHA does have a potential disadvantage, and that is the way mortgage insurance (MI) is handled. Lenders require mortgage insurance to limit their risk any time the loan is for more than 80% of the property’s value. With a conventional loan, a borrower can ask the lender to remove the MI once they can demonstrate that the loan is less than 80% of the property’s value. With FHA, the mortgage insurance will be in place for the life of the loan. Borrowers pay MI in two ways: there is an up-front premium that’s added to the loan and a monthly premium that is also added to the payment.

FHA loan calculations can be a little tricky to explain in this medium so you should absolutely reach out to a trusted, licensed lender like ME, to better understand or apply for an FHA loan.

Good Luck and thank you for visiting my blog! Please reach out or leave a comment or question. 

Roxy Redenbaugh, Broker
Sr Mortgage Consultant
Residential and Commercial
The Greatest Compliment I Can Receive Is A Referral From Friends, Family, and Business Associates,
NMLS#269926 Company NMLS#1930219