Small-balance commercial mortgage are tools for small business owners seeking to achieve various financial goals. While going through the process of obtaining one of these mortgages, a borrower is going to encounter a lot of terms that may be unfamiliar. As a commercial mortgage broker, it’s your job to make sure that they understand.
Here are some common terms your borrower should know:
A commercial mortgage is a mortgage loan made using a commercial property as collateral to secure repayment. These loans are all that unlike from residential mortgages, the main difference being that the property in question is used for business purposes.
Commercial mortgage collateral
Commercial mortgage collateral is income-producing property, such as a retail store, multifamily housing, an office building, a mixed-use property, and many others. This property is pledged for the repayment of the mortgage.
Financial statements are variety of documents that clearly show your borrower’s current financial situation. These can include cash flow statements, income and expense reports, personal financial statements, as well as other documents that show the commercial property’s cash flow. These documents give lenders a clearer picture of how well your borrower will be able to make their monthly payments.
Terms of a commercial mortgage
In the United States, commercial mortgages may offer the following terms depending on the agreement with the lender.
- Fixed rate: The interest rate on the mortgage note remains unchanged throughout the life of the mortgage. Your borrower will make fixed monthly payments until the mortgage is paid off.
- Adjustable rate (ARM): The interest rate on the mortgage note periodically adjusts on specific dates (e.g. monthly, quarterly, annually). The rate is stated as a margin over a published index, such as the 10-Year Treasury or the 11th District Cost of Funds Index (COFI).
- Balloon payment: In this situation, the mortgage does not fully amortize over the term of the mortgage note, resulting in a balance due at the time of maturity.
Amortization is the distribution of mortgage payments in periodic installments throughout the life of the mortgage. For example, if your borrower has a fully-amortized commercial mortgage, then their last payment will pay off all remaining principal and interest of the mortgage.
Loan-to-value (LTV) ratio
LTV is the ratio between the principal amount of the mortgage balance and the current value of the pledged collateral. The ratio is generally expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is not fixed and varies by lending institution, geographic location, property size, property type, and other factors.
The process of obtaining a small-balance commercial mortgage can seem daunting to borrowers if they aren’t familiar with the above terminology. By explaining the common phrases they’ll be hearing as you both work to secure them financing, you’ll be establishing your expertise and putting their mind at ease. This will allow you to work more efficiently and close the mortgage more quickly.