How to Find the Best Commercial Mortgage Lenders
March 29, 2019
Most homeowners have experience finding and taking mortgage loans. However, commercial mortgage lending is quite different from what you’ve experienced with your residential mortgage. For one thing, commercial properties can be much more expensive and require more complex contracts. In this article, we’ll explore the world of commercial mortgage lenders, commercial mortgage brokers and direct lenders. Then we’ll focus on direct lenders versus mortgage brokers.
What Are Commercial Mortgage Lenders?
For example, commercial mortgage lenders include:
- Credit unions
- Asset-backed trusts
- Government-sponsored enterprises
- Life insurance companies
- Private lenders
- Other funding sources
These lenders make mortgage loans secured by commercial property. Generally, commercial developers and investors use mortgage loans for acquiring, refinancing or redeveloping commercial real estate. Therefore, the job of a commercial mortgage lender is to understand your project’s financial needs. Then, the lender must deliver the right financing to satisfy exactly those needs.
Naturally, the lender must structure the mortgage loan terms in a way that satisfies both borrower and lender. Thus, the lender will specify the loan amount, the term until maturity, and the fixed or variable interest rate. Also specified are the amortization schedule, balloon payments, prepayment penalties, and recourse language, if any. Optionally, there may be restrictions placed upon the borrower until loan repayment completes. Without exception, commercial mortgages receive extensive underwriting, because commercial mortgage lenders must practice substantial due diligence.
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Mortgage Loan Terms
The first mortgage term to consider is, well, term. In this context, the term is the amount of time until the loan matures. On the maturation date (or sooner), the borrower pays off the mortgage loan and deed of trust is released. Typically, most commercial mortgage loans have a 5-year to 10-year term, though certainly some can be shorter or longer. To be clear, the amortization schedule specifies the monthly loan payments allocation between principal and interest. Most often in a commercial loan, the amortization schedule exceeds the loan term. Finally, a balloon payment will retire the loan.
Some commercial mortgage loans pack a prepayment penalty. For example, prepayments on a conduit loan may require defeasance or yield maintenance. Also, recourse loans require the borrower to pledge assets to collateralize the loan. Importantly, commercial mortgage loans are different from short-term to intermediate-term loans. Explicitly, these include construction loans, bridge loans and mini-perm loans. As we’ll see, a commercial loan broker handles all kinds of commercial loans, not just mortgages.
Types of Commercial Mortgage Lenders
Before you can identify the best commercial mortgage lenders, you must know the different types of lenders available. Here is the commercial mortgage lenders list:
- Banks and Credit Unions: Banks originate the largest number of commercial mortgage loans. Unfortunately, they also have some of the strictest underwriting standards. Frequently, banks provide guaranteed mortgages from the SBA and other agencies, but these can take many months to process. Honestly, the best pick of a bank might be the one closest to the subject property. By the way, credit unions have become increasingly competitive in the commercial mortgage market as well.
- Life Insurance Companies: These commercial mortgage lenders have great rates but are very choosy. Typically, they make large loans on new, fully leased properties with a loan-to-value (LTV) below 53%.
- Conduits: The are mortgage bankers who sell their mortgages to CMBS packagers, including government-sponsored enterprises and private issuers. Normally, these mortgages have good rates and are easier to close than those from some other sources.
- Private Lenders: This is a varied group of private equity lenders, partnerships, hedge funds, private mortgage REITs and others. Honestly, these are often the best source of funding when you can’t or won’t deal with banks. Unfortunately, you need connections to deal with many private lenders. However, as we shall see, the best mortgage brokers should be able to connect you to multiple private lenders.
What’s the Difference Between Mortgage Brokers and Mortgage Lenders?
Mortgage lenders are institutions that offer a specific set of loan products. When you borrow from a mortgage lender, you work directly with the lender. This can be a blessing or a curse, depending on the organization and its representatives. When you go to a bank for a commercial mortgage, you will interact with a loan officer, the forward face of the institution. Normally, you will not have access to the many people behind the scenes. Specifically, these include the members of the loan committee, the underwriters, appraisers, the FDIC, lawyers, accountants and others.
A mortgage broker is also responsible for getting you a commercial mortgage. However, unlike a mortgage lender, a mortgage broker can work with an entire network of mortgage lenders. Happily, this allows the mortgage broker to find you the loan options that best meet your needs. Frequently, the mortgage broker is an individual who runs or works at a loan brokerage firm. Therefore, the person you work with is the point person for finding you the perfect loan. Often, the best commercial mortgage lenders “graduate” to become mortgage brokers. That is, they have the experience and expertise to procure the absolute best deal terms to fit your circumstances. Commercial mortgage brokers close 70% of all commercial loans in the U.S. There’s a very good reason for this!
For more information, you can read these comprehensive articles:
- Complete Guide to Commercial Mortgage Brokers
- How to Work with Commercial Loan Brokers
- 6 Keys to Impress Commercial Lenders
Mortgage Brokers vs Direct Lenders: Which Is Best?
Direct lenders provide loans using their own funding. A bank, conduit lender, or insurance company uses internal resources to fund commercial mortgage loans. Basically, mortgage lenders and direct lenders are one and the same. A mortgage broker works with many direct lenders, but is not itself a direct lender. In other words, mortgage brokers can exercise independent judgment to get you the loan you want.
There are several reasons why you might prefer working with a mortgage broker instead of a direct lender, including:
1. Freedom of Choice
When you work with a direct lender, you must settle for whatever loan products the one lender offers. Sometimes it’s a good fit, but most often it is not the best fit. Unfortunately, loan officers succeed at their firms by selling the company’s products. However, the role of the mortgage broker is very different. Essentially, a mortgage broker can pick and choose from all the products offered from the broker’s network and beyond. Obviously, this opens the possibility for greater choice and a better fit with the borrower’s needs.
Related to the previous point, banks and other direct lenders have little flexibility in the loans they offer. Realistically, this is especially true when banks look at your risk factors and judge you unfavorably. Frequently, a mortgage broker’s network will include entrepreneurial direct lenders who might be willing bend or break from the standard underwriting norms. Of course, that’s the best way to obtain a highly customized commercial mortgage.
For commercial loans, comparison shopping among many direct lenders requires a lot of legwork and substantial industry knowledge. Unfortunately, you might have to visit different lenders, explain your project and wade through the products offered. Truly, you might waste so much time trying to identify the best loan for your purposes. On the other hand, a mortgage broker does this tedious legwork for you. Helpfully, the broker will communicate with its network and field inquiries on your behalf. Therefore, the time you save could be immense.
Speaking of saving time, banks and other direct lenders are notorious for slow progress. Really, if you want a guaranteed loan from a bank, you might be waiting for six months or more. Clearly this is not viable for many real estate developers and investors. Usually, you’ll find a good loan broker who can close on a mortgage much faster than a direct lender can.