2020 is expected to be another record year for commercial and multifamily lending, according to a forecast released by the Mortgage Bankers Association last week. Mortgage bankers operating in this sphere are expected to close $683 billion of loans backed by income-producing properties in 2020, an increase of 9% over 2019’s projected record volume of $628 billion.
“Commercial and multifamily real estate markets got a shot in the arm from low interest rates in 2019,” according to Jaime Woodwell, MBA’s Vice President of Commercial Real Estate (CRE) Research. “In addition to making mortgage borrowing less expensive, lower yields on a broad array of investment options are buoying values of industrial, apartment, office, retail and other income-producing properties. This increase in property values is expected to translate into increased sales transactions and a demand for mortgage debt in 2020.”
The coming year’s expected growth represents a big opportunity for commercial mortgage brokers, so if you’re currently only funding residential deals, it might be time to consider expanding your business.
For brokers new to the commercial side of the industry, small-balance commercial mortgages are an easy way to get started and increase your income. Here’s how we recommend you get started.
How can I become a commercial mortgage broker?
In most states, it’s as simple as deciding you’re going to broker commercial mortgages. There are some states the require a separate license to broker these types of mortgages, but many states don’t have any licensing requirements. That being said, we do recommend that you educate yourself about the small-balance commercial mortgage industry regardless of your state’s prerequisites.
Here are some basics: a small-balance commercial mortgage generally refers to a mortgage under $5 million that is secured by commercial real estate. While banks will lend smaller amounts to some businesses, there are a lot of limits as to who can qualify for these loans. The Small Business Administration (SBA) will also provide small-balance mortgages to qualifying businesses, but again, it can be hard for some commercial property owners to qualify for these loans.
For these borrowers, alternative small-balance commercial mortgages are crucial, and it’s where lenders like APEX step in to fill the gap between traditional financing and true hard money lending. Brokers would do well to pay attention to this underserved market. Many small business owners and commercial property investors are non-bankable for reasons ranging from past credit issues to IRS debt to an inability to verify their income to a bank’s satisfaction. However, these individuals still need financing, and more likely than not, they’ll need a broker to help them find the right lender.
When you decide to become a commercial mortgage broker, we recommend you get to know a variety of lenders and what they can offer potential borrowers. Lenders need brokers to succeed, so they have a vested interest in guiding you through the industry and the process of closing these mortgages. They’ll be great resources for you. We also recommend joining industry groups, attending any classes, webinars, and in-person seminars that you think will benefit you, and keeping up with the news and trends in industry publications.
How will I know if a commercial mortgage isn’t bankable?
Often, borrowers will be coming to you after experiencing a bank turndown. However, there are several common reasons to keep in mind when reviewing a deal.
Many borrowers are turned down because banks tend to have very strict guidelines when it comes to credit. So, let’s say you’ve got a small business owner who has experienced some financial issues in the past. They’ve got it under control, and they’re rebuilding, but their story isn’t going to matter if the numbers don’t fit within the bank’s box. This is when an alternative commercial mortgage lender should be introduced. While your borrower’s credit history is important, these lenders will listen to your borrower’s story and take the time to fully understand their financial situation.
IRS debt is another common reason for bank turndowns. If your borrower is behind on taxes, they’re going to need alternative financing in order to pay off that debt. It’s as simple as that. Additionally, if your borrower cannot verify their income to a bank’s satisfaction through the tax returns, they will be turned down. Alternative commercial mortgage lenders can use a variety of financial documents to understand your borrower’s income and provide them with financing based on a more comprehensive picture.
Sometimes your borrower is just going to need funds faster than a bank can provide. If you’re working with a small business owner or commercial property investor who needs money fast, you’re going to need to think outside the bank.
The commercial mortgage industry is growing and, as such, is full of opportunity for enterprising brokers. The alternative, small-balance commercial mortgage niche is a great place for brokers new to the industry to start. With the right information and education, you can start closing small-balance commercial mortgages and increase your income. Remember, lenders can provide a lot of necessary guidance when you’re first getting started, and APEX is happy to be a resource for brokers.