Small-balance commercial mortgage loans are like a savior for commercial borrowers who don’t qualify for bank loans because of different reasons. Whether it’s about purchasing real estate for business expansion or other needs for business growth, small-balance commercial mortgage loans make it easier for business owners as the process and documentation aren’t complicated. 


Many borrowers are doubtful about small-balance commercial mortgage loans. But, truly speaking, there is nothing to worry about, especially if you are working with one of the best small-balance commercial mortgage lenders. The only thing is you should keep some important points in your mind dealing with the same.


In this post, we will discuss some important points/details about small-balance commercial mortgage loans


Key terms 

When you will work with a small-balance commercial mortgage lender, you will come across different terms. The terms might be difficult for you to understand, making the loan process complicated. Here, we will list a few of the important and common loan terms. 


Net Operating Income or NOI 

The calculation of the Net Operating Income (NOI) is property income fewer property expenses(property income-property expenses). Regarding expenses, they are varied depending on the lease type but include taxes, utility and electricity bills, cleaning services, landscaping, management fees, etc. 


Debt-Service Coverage Ratio or DSCR

The calculation of the debt-service coverage ratio is Net Operating Income divided by the annual mortgage payment (NOI/Annual mortgage payment). The literal meaning of debt-service coverage ratio is the ability of the mortgaged property to cover the annual debt payment. 


If the DSCR's value is more, it indicates that Net Operating Income will cover the annual mortgage payment. 


CAP Rate 

The calculation of CAP rate is Net Operating Income divided by the property value. This rate is expressed as a percentage. With this, people evaluate a property’s expected rate of return. 


Capital Expenditures or CAPEX

There is no such calculation for capital expenditures (CAPEX). This is the amount of money kept aside for property improvements that cannot be immediately expensed as a current operating expense for tax purposes. 


The list of property improvements includes a new roof, tenant improvements, and parking lots. 


Rent Roll

This is important for property owners who get rental income from an income-producing real estate asset. In the loan process, this term is often discussed and plays a crucial role. 


The details included in a rent roll are the tenant names, unit size, and lease terms such as start date and lease-end date. 


Calculation of interest rate for small-balance commercial mortgage loans 


The prime interest rate

Every loan amount works on a certain prime interest rate. The small-balance commercial mortgage lenders find prime interest rates using government websites or other sources. Sometimes, they consider prime rates as a base value for setting the interest rates for their loans. Later, they adjust the interest rates depending on the factors. A few of the factors are discussed below. 


The personal/business credit score 

Though personal and business credit scores are distinct, they majorly affect the interest rates offered by any prospective small-balance commercial mortgage lender. The credit score depends on your spending and borrowing habits, your history of credit card and other bill payments, and your open or debit accounts. 


It’s said that the higher your personal and business credit scores are, the higher the chances of getting an optimal commercial mortgage rate and loan approval. 


The loan term 

The loan term of the small-balance commercial mortgage plays a very crucial role in determining the interest rate. The loan term means the repayment time. It’s said that the longer a repayment term is, the higher the interest rate will be because it will cost the lender more and the risk is pretty high.


Short-term commercial mortgage comes with lower than average interest rates because the risk of the lender is less when giving the money. The lenders don’t have to wait for long to get the money back. 


Other related factors 

The three factors are very crucial. No loan processes without mentioning or discussing these factors. But, they are not all. There are other related factors as well. Factors like the size of the initial down payment and whether the interest rate is fixed or variable. 


Both the factors and decisions based on them are taken by the lenders depending on your financial condition. 


Ways to make loan processing easier 


You should choose an experienced lender 

If it’s your first time, working with an experienced small-balance commercial mortgage lender will be helpful. An experienced lender understands the ins and outs of the process and knows what to do, how to do and when to do it. Also, the longevity in the industry proves the lender’s success and ability to adapt. Such a lender will teach you about the industry and guide you through the process. 


You should learn about the programs 

A small-balance commercial mortgage is a broad category, which has different programs under it. Before applying, you should develop a strong understanding of the lender’s programs. You should take time out and understand the document submission, underwriting, and closing process. 


You should understand the documents to submit 

Every small-balance commercial mortgage lender's documentation and submission requirements are different. So, you should discuss and understand the same before making any move. A few of the common documents are a completed application form, a recent credit card report, and a summary of the deal. 


You should work with a lender who handles deal processing 

An experienced small-balance commercial mortgage lender will guide you thoroughly through the loan process but might not handle the processing of the deal. This can be a nightmare for you because the process is very complicated. So, it’s better to work with an experienced lender who can handle the deal process for you. This would be a great step if you are applying for the first time. Chances of mistakes will reduce but chances of approval will increase. 


To know more about small-balance commercial mortgages, contact Royale Capital