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Connecticut Commercial Mortgage
Connecticut investor and commercial mortgage frequently asked questions
Back to Commercial Mortgage Home - click here
1.) How long does it take
to close a commercial loan?
2.)
What's a "Low Doc" program?
3.) What is an adjustable Prime or LIBOR
rate loan?
4.)
Should I get a fixed or adjustable
rate mortgage?
5.)
Why should I work with you instead
of my bank?
6.)
Can you please outline the
commercial loan process?
7.)
What is a hard money loan?
8.)
Are you a broker or a lender and
what's the difference?
9.)
I already have an appraisal why
can't I use it?
10.)
Why does my loan have a pre-payment
penalty?
11.) Do you provide loans throughout the
United States?
12.)
Who are your lending sources?
13.)
What are a CAP rate, NOI, and debt service ratio?
14.) What's the difference between a
residential and a commercial loan?
15.)
How do I get the best rate?
16.)
What
causes mortgage interest rates to change?
17.)
Is a direct lender better
than a mortgage broker?
1.) How long does it take to close a commercial loan?
We can generally give you an assessment of your situation in our first conversation. You can get pre-qualified in a couple days or less. For "Lite Doc" programs, approval and closing can take place within 3-4 weeks. Full documentation loans that require third party reports such as appraisals and environmental inspections usually take between 30-60 days to close. Providing us with complete information and documentation early on can speed the process considerably.
2.) What's a "Low Doc" program?
Some commercial lenders offer "Low Doc" or "Lite Doc" programs. These programs require less documentation, verification and paperwork than a fully documented loan. The lender takes more risk when making a loan with less information, so "Low Doc" loans are useful if a borrower is in a hurry to close a loan or can not provide evidence to fully document income or assets or tax returns. Because the lender is carrying more risk for the loan, they also carry a higher interest rate.3.) What is an adjustable Prime or LIBOR rate loan?
Prime is the interest rate that U.S. banks charge to their most creditworthy customers. Adjustments to the prime rate are made by banks at the same time although, the prime rate does not adjust on any regular basis. LIBOR is an acronym for "London Inter-Bank Offered Rate". It's similar to the U.S. Fed Funds Rate. It represents the rate at which banks are willing to loan money to each other in London. It's an international standard for interest rates and it can be expressed as 1-month, 3-month, 6-month and 1-year rates. Adjustable Prime or LIBOR rate loans are loans that adjust up or down with Prime or LIBOR.4.) Should I get a fixed or adjustable rate mortgage?
Each has its benefits. With an adjustable rate mortgage, you may get a lower initial interest rate. If the rate goes up, theoretically there is inflation or the economy is improving and you can also increase your rental rates or prices to offset your increased interest rate. Unfortunately, if rates continue to increase you may have been better off getting a fixed rate loan in the first place. On a fixed rate loan, the initial interest rate may higher however, you have minimized your exposure to rising rates. How do you decide which to choose? It's really a function of how long you expect to own the property and what you expect rates to do during that period. There's no sense in paying for a 30 year fixed rate if you know you are selling the property in 5 years. You can also get a loan that's amortized over 30 years (meaning the payment is stretched out over 30 years) however the interest rate is only fixed for the first 5. Of course, we cannot give you definitive advice on which program to choose because we cannot predict exactly what rates will do. However, the first thing we do is to discuss your needs and explain the different options available to you.
5.) Why should I work with you instead of my bank?
We are not trying to discourage you from working with your bank. In fact, you should stop by the bank first. Generally speaking, here are a few of the problems you may run in to.
Banks only fund certain types of deals, subject to their loan committee Banks require more paperwork Requires long term banking relationship including offsetting deposit accounts They prefer to work with "A" credit customers Has more rigorous underwriting criteria Often has 3 to 5 year balloon payments designed to mitigate the banks' exposure Doesn't like to amortize loans more then 15 or 20 years Offers plain vanilla type programs; non-flexible Often has higher interest rates or fees to pay for the banks overhead Banks don't like to provide commercial loans less then a few million dollars Requires extensive experience to qualify for the loan A bank can take much longer to finally close the loan
It is not our intention to detract from service provided by banks. Occasionally, we broker certain types of loans through banks because they have the infrastructure to service the transaction. In this scenario, we provide the time saving service of knowing which bank will fund a particular type of loan and submit the loan on the customers' behalf.6.) Can you please outline the commercial loan process?
We process your application in a planned and consistent manner. Each item listed below is essential to the reviewing, processing, underwriting and closing of your loan. An average benchmark for a standard commercial loan package from submission to close, is 45 days. Please understand, this is an estimate and does not take into account delays resulting from your having to provide additional documentation or the time constraints of third parties, i.e., appraisal or inspection firms. Finally, the clearing and satisfaction of conditions requested by the underwriter / lender and any title or insurance issues may also affect this estimate.
Review of executive summary or application for loan request Issuance of initial docs, including rate and term sheet which outline the loan Receipt of initial docs with check for appraisal and initial fees Request for due diligence materials, i.e., financials, appraisals, tax returns, etc. Due diligence, review of the materials you have provided Underwriting Review and issuance of loan conditions Receipt and review of loan conditions Issuance of commitment letter Loan closing
It is our goal to assist you and make the financing process as quick and simple as possible.7.) What is a "Hard Money" loan?
The term "Hard money" loan evolved from a general meaning relating to a loan for hard cash. The meaning has evolved through the years to include non-conventional real estate loans, privately funded loans, second trust deeds and equity loans. Generally, a hard money loan is one in which the lender can approve the loan based primarily upon real estate equity. With a hard money loan, the borrower is able to side step much of the usual time required to close a conventional loan. Even if the borrower is unemployed, has bad credit or has no credit, the loan may be approved based on the equity in the property. On occasion, a borrower may have flawless credit and still be willing to pay more to obtain a hard money loan if he is in a hurry to close. Hard money loans can be obtained on commercial properties in loan amounts of 50k and up, at a maximum of 50 - 75% of the appraised value of the property. There is generally an initial fee of 4 or more percentage points to close the loan and rates are generally 12% and higher. Additionally, these are usually shorter term loans ranging from 1 or 2 years until long term financing can be put in place. Most often, there is no penalty for early re-payment of the loan. Keep in mind, the loan must "make sense" and the lender will still want to see a clear strategy for repayment of the loan.8.) Are you a broker or a lender and what's the difference?
We are a broker. A broker does not actually lend the money, they find the appropriate lender and program for you. There are many benefits to using a broker and here are just a few:
Many lenders only work through brokers and not directly with the public A broker can have hundreds of different lenders and programs available Brokers are often more flexible and willing to talk about difficult or unique deals A broker will help you correctly package your loan to increase the chance of approval A broker will know which lenders to present the loan to, thus saving time and money Brokers can often negotiate a better deal with the lender on your behalf A broker through his network, will often find a better or more suitable loan for your needs Brokers have a broad knowledge of programs and may provide more valuable input 9.) I already have my own appraisal, why can't I use it?
Occasionally we can. If you already have an appraisal, please let us know right away. It is possible for the lender to review the appraisal and use it. Most likely, there will be a smaller fee to get the appraisal updated and re-issued in the lenders name. If you do not currently have an appraisal, don't go out and get one. The lender will want to order the appraisal directly from their office and have it put in their name. They like to make certain that no outside entities are influencing the appraisers' figures. You are entitled to a copy of the appraisal after the loan closes. If you elect not to close the loan or the lender is not able to close the loan for any reason, you are entitled to a copy of the appraisal at that time.10.) Why does my loan have a pre-payment penalty?
When you close a loan with a bank, you are subject to getting approved if that bank wants to invest in you and your project. When you close a loan with a private lender, that loan is generally securitized and sold on Wall Street or some other secondary market in blocks of 100 million or more. If you pre-pay the loan, the investors would actually loose money on the loan because the loan is discounted when it is sold. The pre-payment penalty is a safety net for the investor otherwise, they would have to charge a much higher interest rate. Some lenders have options to buy out of, or reduce pre-payment penalties for a fee. Another option is to find a lender that allows the loan to be assumed, thus avoiding the pre-payment penalty. This is where the knowledge and resources of the broker become apparent.11.) Do you provide loans throughout the United States?
All but a few states, please call to inquire. We also have some international lenders.12.) Who are your lending sources?
Our sources include insurance companies, pension funds, banks, saving institutions, thrifts, conduits, real estate investment trusts (REIT's) and private lenders. We have well established relationships with a wide variety of lending institutions and companies, and therefore have a large selection of loan programs available.13.) What are CAP rates, net operating income and debt service coverage ratios?
CAP rate is a measure of the rate of return on an investment. It's used to quickly compare profitability from one property to another. It is calculated as: Annual Net Operating Income (NOI) divided by purchase price or CAP Rate = NOI/Purchase Price. At the end of the day, the property is really worth the amount of cash it generates therefore, we can also say NOI/Cap Rate = Value.
Net Operating Income is calculated as all revenue associated with the property less all expenses associated with the property. All expenses include: property taxes, insurance, maintenance, utilities, property management and miscellaneous expenses (it does not include interest expense or amortization of the debt). If some of the expenses are paid by the tenants, they of course are not included in the calculation.
Debt Service Coverage Ratio is a gauge of the properties ability to pay back the loan from the cash it generates. It is calculated as Annual Net Operating Income divided by Annual Debt Service. Annual Debt Service is the annual principal and interest payment associated with the loan. Underwriters like to see this ratio at 1.20% or higher. If the Debt Service Coverage Ratio is 1.20% or higher, the property is said to "Cash Flow". Please see the glossary for additional terms and definitions.14.) What is the difference between a residential and a commercial mortgage loan?
Don't confuse these or the programs available with each. A residential loan is governed by RESPA (Real Estate Settlement Procedures Act) and commercial loans are not. A residential loan applies to single family residences with 1 - 4 units. If a property has 5 or more units, it's considered multi-family and a commercial loan applies (in most states). There are exceptions to this. For example; if there is a single family residence that gets re-zoned as commercial, the property would require a commercial loan. In fact, whenever a property is zoned commercial, it will require a commercial loan.15.) How Do I Get The Best Rate?
It is NEVER about the best rate. It is about the best MATH, period. There is NO other answer than that. So why isn't the lowest rate the best deal? First, lower rates come with more points and fees. That's not the real issue either. There is a break even point to contend with when paying points and fees, tax deductions to figure out and your available cash. In the case of a purchase loan, points are tax deductible in the year that you pay them. That is good, but then again, so is the interest you think you are saving. With refinances, the points are usually only deductible over the full term of the loan. That could be 30 years, making the benefits and the break even point years down the road. So why do so many lenders advertise really low rates with all of those points and fees? Because they know most consumers look at the rate, not the math. That advertising strategy works really well. How about the lowest APR? Often, the more points you pay, the lower the rate and APR. True, but not the answer. Get your loan officer to take apart each rate and fee quote to find out what the best MATH is for you, period. It only takes a few seconds for a professional to do it. After that, it's your decision.
16.)What Causes Mortgage Rates To Change?Did you know that one or more rate changes per day is normal? Actually, it is unusual not to have at least one rate change in a day. Most people do not know that. Rate quotes can change when you call back later that same day. In the lending business, a rate change can also include a change in the point cost for the same rate. In other words, a rate can be no points in the morning, then later that day cost ¼ point. That is a rate change to lenders. Did you also know that mortgage rates are not directly affected by what Alan Greenspan does? Many times a fed rate cut can cause mortgage rates to go up. Mortgage rates change primarily based on: 1) the perception of inflation, 2) times of uncertainty and 3) the movement of money in and out of the stock market--that's it. When a piece of economic data shows weakness or uncertainty in the economy, rates tend to fall. The opposite is also true. A drop in the unemployment rate, a rise in durable goods orders, a rise in the consumer confidence index--rates go up. These influencing factors can present themselves at any time, many without warning, affecting mortgage rates instantly. There is no "delay". It doesn't take time to "filter down" like some people think. Reading the paper for quotes doesn't really work because the information is old by the time you read it. Radio, TV and billboards are not the answer because the details are always missing. They just want to get you on the phone. Competitive lenders can deliver nearly identical rates to each other. Most borrowers don't ask the right questions and focus only on the interest rate. Try to think MATH and as it pertains to you. That's all that matters.
17.)Is A Direct Lender Better Than A Mortgage Broker?
No. First, if a couple of lenders were always the cheapest, everyone would eventually know about them, right? Over the last several years, we have seen amazing advances in home mortgages. Today’s homebuyer has the widest variety and the most unusual types of loans ever available. Mortgage brokers have dozens more of these loan programs for customers than any single lender. And most of the time, they can provide better deals. This is because they represent the WHOLESALE rates of these lenders. These are rates and fees not available to the public. For example, ABC Bank might be quoting you 5.5% and 1 point for a loan. A broker representing the very same bank can also quote the same rate and fee. The broker is probably paying NO points for that loan. They add the point back and keep it for themselves. They can also quote ¾ of a point and beat the retail quote of that bank. This is the essence of broker competitiveness. The “best deal” is always changing from lender to lender. A broker has so many sources and receives so much up to date pricing, you are more likely to save money than not. Next time a big national lender tells you that the broker is only a middle man and therefore cannot beat their deal, get it in writing.
The bottom line is that there is no one source that is the cheapest. The only other way most lenders can compete with one another is to somehow convince the public that they have some "secret way" of providing lower than market rates. The market is the market and you pay for it one way or another. Work with a mortgage professional that can explain it all in make sense terms.
Call 860-225-5731/712-5553
