August 24, 2016
As stated in the most recent blog, Commercial Mortgage (Maximum Size) (the first part), the majority of investors want the biggest size mortgage they can afford in order to receive a larger investment as well as a larger property. In the first part, we covered 2 things the investor can do to get a bigger loan.
The first one is to get the greatest number of years of amortization. The larger the number of years of amortization, the smaller your payments. If you are looking for a multifamily loan, most banks do 15 year, 20 year, and at times 25 year amortization. We at Apartment Loan Store, the heavy majority of the time, give 30 year amortizations to our investors.
The second one is to locate lenders who loan at the actual rate. If your goal is to get a maximum size loan, the reason you want the loan at the actual rate is that there is no underwriting adjustment. An underwriting adjustment gives you a smaller loan to compensate for the problem that can come up from loan rates being much higher at the termination of your loan period. If loan rates are much higher, your payments could be substantially higher on your refinance. This could be a big increase of financial risk.
In part two of Maximum Commercial Mortgages we are covering two more ways in which you can receive a loan that gives you a bigger investment and bigger size property. Get the lowest loan rate you can and get the lowest Debt Service Coverage Ratio you can.
- Get the lowest loan rate you can get.
As a rule, the lower the loan rate, the lower your payments and the greater size loan you can get. However, you’ve got to understand other important moving parts for this to work. For example, you need to know that at the same time you get a low rate, you need to get a high amortization along with it.
It seems pretty evident to me that the most important thing to the investor when getting a commercial loan is getting the lowest rate possible. And loan rate is super important. But, there is something to be cautious about - be careful about believing the quote you are given unless you are at the point in the loan process of getting a term sheet. Many lenders will give you a lower rate than is available to hook you to work with them. They have lied to you.
Then when they issue the term sheet, they may tell you another lie. They may tell you that rates went up substantially when they really didn’t. They are simply covering their first lie of giving you a dishonest (low) quote. The rate to believe is the rate that is issued at the term sheet. Therefore take the rate you are given with a grain of salt. If you’ve done your due diligence on the lender and feel comfortable with them, get a term sheet issued to see the true rate.
- Get the lowest Debt Service Coverage Ratio (DSCR) you can to have a larger loan.
The debt service coverage ratio simply shows if the income you are getting from the property is enough to make your payments. If you can make only $10,000 per month income from your property, but the amount of debt (loan payment) you have to pay is $12,000, you would be operating at a loss and would not be able to get a loan. The majority of lenders require the investor to have a minimum of 25 cents left over for every dollar of loan payment. This would be $1.25 of income to a dollar of debt – a 1.25 debt service coverage ratio.
But there is a double edged sword here. If you get a loan with a low debt service coverage ratio, you have a riskier loan. If an investor’s profit is low, the investor may not be able to cover emergencies such as expensive roof repair or plumbing repair.
Contact us to see if you pre-qualify for our best multifamily, commercial, construction, hard money/bridge, or business loan rates and terms. Also, contact us if you would like to discuss your particular commercial lending needs, or if you have any questions. Call 214-695-7310, or send an email to email@example.com
Bruce Painter, Director of Marketing, Business Loan Store