Times are challenging for originators.
There are too few residential loans to go around, and the phones don’t ring like they used to during the refi boom. Residential mortgage brokers, however, don’t have to sit there and take it passively. They have an outstanding opportunity to open a new channel—and a significant new revenue source—commercial mortgages.
Adding that product, and the commissions they generate, requires knowing a few key ratios, and the information required to calculate them. The originator might not even have to do the calculations—but merely serve as a facilitator of the loan process.
Many originators don’t know the commercial side, so they’ve preferred to refer the business to someone else. Sacrificing a great source of revenue.
It’s not difficult—or at least it doesn’t have to be.
Doing commercial loans are straightforward—once they are explained to residential originators. “It’s foolish to pass on this revenue stream. How long do you think you’ll be in business, if you don’t stop doing that?” said Ed Ainbinder, SVP for national loan production at CherryWood Mortgage. “Mortgage brokers can generate an enormous revenue stream without the regulations that residential mortgages operate under.”
For brokers that are willing to take their residential cap off, Ainbinder likes to explain commercial loans in terms of residential loans. For instance, supposed there is a multifamily property in Jersey City, N.J., that a client wants a mortgage for. The focus is on the building, the brick and mortar, and the amount of cash flow it generates. Not the income or assets of the borrower.
In a commercial deal, the borrower’s financial picture is replaced with how much revenue a property generates. Ainbinder suggests thinking of the debt service ratio as being equivalent to the debt-to-income ratio that’s used on the residential side. And the W2 as being equivalent to the rent roll.
For instance, the borrower of the property in Jersey City might want an $8 million loan, but based on the revenue that’s generated, he can qualify for no more than a $4 million mortgage or a cash out.
“The debt service ratio tells us the affordability of the property. For that, we need the operating expenses, including taxes, rent roll, insurance, and within minutes, the broker will know the amount of a loan a property can qualify for,” said Ainbinder. Property data and some financial calculations can be entered on the Angel Oak app. In fact, he and his team will complete all the calculations for the broker, and the process is faster than a residential loan.
Even borrowers with poor credit, or lack of experience, with a sensible explanation can get “to the finish line.” In addition, it’s possible for a borrower to choose from among a full, part or no-documentation loan.