For residential brokers looking to expand their business and increase their income, the small-balance commercial mortgage niche is a great place to start. If you work with the right lender, these deals are simple to close.
However, before you get started, there are some key differences between residential and commercial mortgages of which you should be aware:
The biggest difference between residential and small-balance commercial mortgages (and the one most likely to catch your borrowers’ attention), will be the interest rate. Because commercial mortgages require a higher degree of specialization and are a greater risk for a lender if a borrower defaults, these loans will come with a higher rate whether your borrower can qualify for bank financing or need to turn to an alternative lender.
Because there’s less regulation on the commercial side of the mortgage industry, particularly when you’re working with non-bankable borrowers, many lenders will need less documentation to begin underwriting the deal. For example, many alternative commercial mortgage lenders will require only a completed 1003 or application, a credit report with scores and tradelines and a summary of the deal to determine whether or not they can provide your borrower with financing.
One of the most important things to make your borrowers aware of is that their commercial property appraisal will likely be more expensive than the appraisal that was done for their home. While residential appraisals are fairly simple in scope and, therefore, relatively inexpensive, commercial appraisals can vary greatly in cost. The size of the property, the type of building your borrower is pledging as collateral and the location of the property all affect the cost of a commercial appraisal.
Because of stricter guidelines, residential mortgages can take months to close. This can also be true for commercial mortgages provided by banks. However, if you decide to work with non-bankable borrowers in need of small-balance commercial mortgages, those deals can be closed in a much shorter time frame.
The residential mortgage industry is tightly regulated, and those regulations include the fees that brokers can charge for their services. If you’re looking to earn more on each deal, small-balance commercial mortgages are a great opportunity. The lenders who close these deals for non-bankable borrowers generally allow their brokers to charge higher fees.
The small-balance commercial mortgage niche is a great opportunity for brokers looking to earn more, and understanding how these deals differ from residential mortgages will allow you to get your footing in the industry more quickly. Be aware of these differences and how they’ll affect you and your borrowers, and be prepared to discuss them.