Commercial Mortgages

Using property to secure a loan is a very common practice for businesses, investments, and emergency purposes. The actual property used for a secured loan determines what kind of loan it will be. Most homeowners are familiar with residential loans in which the collateral for the loan is the equity they own in their home. In this way commercial are very similar. One major difference between a residential loan and a commercial loan is the collateral. In a commercial loan, the collateral is of a business nature, either in commercial real estate or business value. However, this is not the only differentiating factor in a commercial loan.

Commercial mortgages are not generally for the use of individual citizens, though in some cases they do include only one borrower. Generally, a commercial mortgage is a loan applied for by a business. Because it is a business applying for the loan rather than an individual, the credit worthiness of that business must be determined for the lender to determine the level of risk. Unlike finding an individual’s credit score, determining business credit is somewhat difficult. Many factors play into the equation, such as the revenues, expenses, debts, history, taxes, etc, and help lenders to determine the level of risk involved in granting a commercial loan to a particular business. Just like residential loans, the higher the risk, the more expensive the loan will be.

Most commercial mortgages also have different terms than residential mortgages. In a common residential mortgage, it might be paid back over a 30 year term with equal payments. Commercial mortgages are usually paid off in much shorter amounts of time, and the payments are smaller with a large balloon payment at the end of the term. In a commercial mortgage, the business might be responsible for paying of 25% or more of the loan in a lump sum at the end of the loan, but in the mean time, the loan payments are much lower than a fixed mortgage.

Because commercial mortgages are generally more risky for lenders, many commercial loans have higher interest rates than other secured loans. It is not uncommon for the rate to be one or two points higher than the current residential rate, but similar to any mortgage, the interest is tax deductible. Though commercial loans may seem like a larger risk, sometimes it is exactly what a business needs to really get off the ground or grow in size. The goal of any business venture is to make that money back and more, so factoring in the costs of commercial loans into your projected sales and revenues will help determine if a commercial loan is worth the risk. A successful business should be making its value back very quickly. If this is not the case, a commercial loan may not be the best idea for your business.


About the Author: Peter Dellane is the President of Ability Mortgage Group, LLC, A leading Maryland Mortgage broker company offering low costs zero point mortgages. For more information on Mortgage Maryland rates and programs please visit www.marylandsmortgage.com.

Mortgages and the Debt to Income Ratio

The most heavily weighed factor in mortgage qualification is your debt to income ratio, or your DTI. This will determine the size of loan you can actually afford. Your DTI is basically the percentage of income that is already claimed by monthly expenses, including rent, bills, car payments, and other loan payments. By taking the amount of monthly expenses and dividing that by your total income, anyone can calculate a debt to income ratio. In order to qualify for particular mortgages, this number must lower than the maximum level, which for most lenders is around 45%.

Here is an example of a DTI. For someone who has an annual income of $120K, their monthly income is $10K. If that person’s monthly liabilities totaled to $4K, then their DTI is 40%. The DTI ratio is then broken into greater detail by separating it into two figures. One figure represents al expenses or liabilities against income, while the other only accounts for a housing payment versus income. Continuing with the previous example, the top figure (including all liabilities) would be 60% if their housing payment was $2K per month, their bottom figure (accounting only for the housing payment) would be at 20%. If a lender requires the top number to fall under 45% and the bottom number to fall under 30%, the person in the example would not qualify.

Some borrowers strategize to pay of debts with their new mortgage. This is definitely an effective way to consolidate debt, but it will not change your DTI. The monthly payments on credit card debt or other revolving accounts will still be considered as part of your debt to income ratio when it comes to qualifying for a mortgage. This is actually designed to protect borrowers and lenders by discouraging the refinancing of credit card debt into a new mortgage only to run the bills back up on those accounts afterwards. By considering these accounts as part of a person’s DTI, the lender is able to see a more accurate representation of that person’s ability to handle debt. This is the case unless the borrower has sufficient verified assets to cover the additional debt that will be refinanced into their new loan.

Most lenders choose to avoid loans that require full documentation if they doubt the potential homeowner’s qualification based on their documented annual income. So lenders offer what are known as reduced documentation loans such as Stated Income/Verified Assets loans, or SIVA as well as No Ratio loans, which require no income or verified assets. Though some people are leery of the legitimacy of a reduced documentation loan, they are actually very helpful tools in certain situations. For those borrowers who have recently increased their annual income and cannot show documented income for that amount over the last two years because it was only recently they obtained it. These loans are also helpful to self-employed borrowers that might have complicated tax schedules.

The debt to income ratio is not only a determining factor in loan application but it is also a great way for people to determine what kind of mortgage they can afford prior to going through the application process. It saves time to understand your DTI situation before beginning the search for a new home.

About the Author: Peter Dellane is the President of Ability Mortgage Group, LLC, A leading Maryland Mortgage broker company offering low costs zero point mortgages. For more information on Mortgage Maryland rates and programs please visit www.marylandsmortgage.com.

Qualifying for a Sub-Prime Mortgage

If your credit score is not so good, it is easy to feel like there is no way you can get a mortgage, when in fact you may qualify for a sub-prime mortgage loan. Before you get too excited, spend some time to learn more about sub-prime loans and how to go about qualifying for one.

In the history of money lending, the industry has been very stiff and static. Previously there was very little negotiation for those without a history of employment, adequate income, and good credit. Over the years, lending has become a more competitive industry, thus developing other options for those who do not fit the perfect barrowing profile. Sub-prime mortgages were created specifically for those who have problems with their credit score. The Fair Isaac Corporation, or fico, calculates your credit score based on your credit history that is noted in a report. Any score over 713 is considered good credit, while anything below 600 is not good. Americans’ average credit score is somewhere around 725.

Sub-prime mortgages are designed for people who have a credit score lower than 620. Because these individuals are considered a higher risk, due to their credit history, the loan will cost a bit more than a traditional mortgage. Since the lender is taking a risk that the individual will make the payments, they should have some compensation right? One of these additional costs will come in the form of a higher interest rate. How much higher is determined by an individual’s specific credit and debt to income ratio situation. This rate can range anywhere from just one point or even four points higher than the prime rate. This is one way the lender will make more profit in exchange for taking a higher risk by granting the loan. The great thing about any mortgage though, which remains true for sub-prime mortgages, is that all interest payments are considered tax write-offs at the end of the year.

Another common cost for a sub-prime mortgage is the amount paid at the beginning of the loan. A lender will quite possible charge your more percentage points of your loan up front to take the absolve some of the risk in association. Any sub-prime lender wants to get as much money on the front end as possible, but they will also be willing to work with individuals to find the perfect fit. These percentage points are also tax deductible.

Almost every sub-prime loan is different from the next because it is designed to work with many different situations. So it is worth considering if you are having some credit score issues but want to begin the best investment of your life in real estate. By talking to a mortgage broker you can take a look at various loan programs they can offer and find the best fit.

About the Author: Peter Dellane is the President of Ability Mortgage Group, LLC, A leading Maryland Mortgage broker company offering low costs zero point mortgages. For more information on Mortgage Maryland rates and programs please visit www.marylandsmortgage.com.