Understanding Direct Lender Mortgages For Commercial Properties

Commercial real estate properties can be excellent investments for business owners, whether located in the heart of Philadelphia or the Delaware Valley. This investment is crucial as it signifies their commitment to long-term business goals and involves establishing a convenient and accessible location for their local customer base. However, challenges often arise before a business purchases a commercial building.

One challenge is the variety of available options. One option is a direct lender mortgage. While these may be aimed at residential home buyers, some direct lenders assist those interested in purchasing commercial property. We will explore the specifics of these types of mortgages in detail and how they differ from mortgage brokers. Let’s begin this guide with what you need to know.

What is a Direct Lender Mortgage?

To begin, a direct lender mortgage is a loan provided by a financial institution or lender. One major difference is that it doesn’t involve any intermediaries, so you won’t deal with mortgage brokers or third-party entities. Since we’re dealing with commercial properties, you’ll work with financial institutions like banks, credit unions, or private lending firms that manage the entire loan process from start to finish.

What Characteristics Do Direct Lender Mortgages Have?

• Faster response times
• Better rates and terms for borrowers compared to other mortgage options
• Direct control over underwriting
• Processing and approval are all in-house

What Is a Direct Lender?

A direct lender originates and funds mortgages using its own capital. It evaluates your application based on the criteria it sets and follows. If the applicant meets these criteria, they will be approved for the loan and receive the funds. As mentioned before, financial entities such as banks, credit unions, and private commercial lenders can qualify as direct lenders. However, non-bank financial institutions and hard money lenders (depending on the situation) can also offer, review, and decide on mortgage applications.

Direct lenders often work with real estate investors, developers, and business owners alike, especially if the goal is to acquire a property for income production. Nevertheless, direct lending may be a suitable option for you if you meet the lender’s criteria for the loan.

What Might Be The Common Recommendations For Direct Lender Applications?

Remember, no two direct lenders, like Penn Street Mortgage, are the same, especially regarding commercial building loans. One reason is that their loan requirements can differ from lender to lender. However, you can prepare in advance for the application process. Consider the following:

Creditworthiness and Financial Standing

Before applying for a commercial property loan, consider these key factors. Lenders usually require a minimum credit score of 600 or higher. Additionally, you’ll need to provide financial statements for both personal and business accounts. You’ll also need documentation showing your liquidity and net worth.

The better your credit and financial standing, the greater your chances of approval. However, approval is not guaranteed, even if you meet the other common recommendations. Let’s continue to discuss some of the others.

Income Stability and Cash Flow

Ensuring that the property generates enough income to cover the loan payments is also critical. Lenders will use the Debt Service Coverage Ratio (DSCR) to make these determinations. Lenders may prefer applicants with a Debt Service Coverage Ratio (DSCR) of 1.20 or higher. Additionally, income stability must be demonstrated to verify whether the borrower can make consistent payments throughout the life of the loan.

Borrower History

If you have borrowed money before for commercial real estate, this can be considered during the application process. Your borrowing history reflects your ability to manage the property and execute a plan that generates income for repayment. New buyers can still qualify even without experience, although some lenders may perceive that as a significant risk. You may have the option to partner with a third party or someone experienced in commercial property investing. 

Loan-to-Value Ratio (LTV)

The simple formula for LTV compares the amount of the loan to the property’s value. It is also a figure that borrowers need to monitor closely, as it may vary from one lender to another. Ideally, an LTV ranging from 65 to 80 percent is typical for most loans. Additionally, lenders use it to assess risk and to formulate loan terms and interest rates that are favorable for borrowers.

These are some of the key factors considered in the commercial property loan process. The criteria established by lenders are stringent and necessitate the proper documentation to be approved or even considered for such loans. 

Mortgage Broker vs Direct Lender: What’s The Difference?

Earlier, we briefly discussed a significant difference between a mortgage broker and a direct lender. That difference was the presence of intermediaries. Now, we will take a moment to explore the distinctions between the two entities in greater depth. Let’s compare the following:

Mortgage brokers

A mortgage broker is a licensed intermediary between you and the lender. Their primary role is to help you secure the most favorable terms and rates for your application. They collaborate with a network of lenders, allowing them to find a lender that approves your application based on the criteria you have met. The main advantage of mortgage brokers is that you gain access to a wide range of lending products, which saves you time.

However, there are some disadvantages. These include slower processing times, communication barriers, and potential broker fees. As such, this can be costly in both time and money. 

Direct lenders

A direct lender manages the entire loan process, from application to funding. Unlike mortgage brokers, these lenders offer their own loan products and apply their own criteria to determine loan eligibility. They are ideal for individuals who want their loan applications completed and reviewed quickly for approval. Communication is more straightforward, with fewer barriers, making it easier and quicker to address any questions or concerns you might have.

For those looking to avoid extra fees, direct lenders are an excellent option since they charge very few. Additionally, their rate structures can be favorable for buyers. However, while these benefits are significant, direct lenders do have some drawbacks.

One drawback is the limited product options, which may require more time for you to decide which is best for you. The underwriting policies may also be strict, meaning you might not qualify for a loan if you don’t meet specific criteria.

Ultimately, direct lenders focus on speed and direct communication, whereas mortgage brokers offer flexibility and variety, albeit with additional fees and communication challenges.

What Are The Benefits of a Direct Lender?

Numerous benefits come with using a direct lender that borrowers can enjoy. For commercial business owners or real estate investors, there are compelling reasons why choosing a direct lender may be their best option. Here are some advantages borrowers can experience if approved:

• • Speed and efficiency: Since there is no middleman between you and the lender, the speed and efficiency of decisions increase. Timing is a key aspect of the commercial mortgage market and its competitiveness. Faster timing can appeal to potential borrowers.

• • Lower costs: Due to reduced involvement from other entities, costs are significantly lower. Direct lenders can offer borrowers more favorable interest rates and may even waive specific fees, if applicable. 

• • Transparency and communication: Direct communication with the lender offers several advantages. It provides real-time updates, reducing the chances of miscommunication. Most importantly, any questions or concerns you may have are addressed promptly and thoroughly. This is much better than playing three-way phone tag with the mortgage broker and the lenders themselves.

• • Personalized underwriting: A direct lender often takes a more hands-on approach with underwriting. They can also consider specific factors, such as underperforming properties that have much stronger future earning potential, as well as other complex situations.

• • Flexible loan structures: This offers a chance to tailor a loan structure to your needs and preferences. It may include interest-only payments, amortization schedules, or even balloon payments.

Types of Mortgage Lenders

As you consider your mortgage options, it is crucial to understand the types that may be available to you. Each one has its own unique features and disadvantages. This knowledge will also help you decide whom you want to work with for long-term commercial property loans. Types of mortgage lenders include:

• • Retail banks include institutions such as Bank of America, Wells Fargo, and others. They are often recognized for offering a wide range of loan products. However, their underwriting criteria tend to be stricter than those of other lenders. Due to their name recognition, they may be popular choices for their reliability, but they frequently deal with multiple borrowers. Consequently, the response time for inquiries may be longer than you would like.

• • Credit unions: Lenders of these financial institutions are owned by their members. They may offer competitive rates and greater personalization. While they tend to focus more on residential loan borrowers, options for commercial lending may be limited.

• • Non-bank lenders: They are lenders who exclusively offer mortgages and loans—nothing more, nothing less. This allows them to provide more flexibility compared to banks. Additionally, their application processing and approval times may be quicker than those of most mortgage lenders. However, this increased flexibility may come with potentially higher interest rates and fees.

• • Private or hard money lenders: If you are focused on short-term financing, this type of mortgage lender may be the best fit for you. The application process and approval may be quick; however, the downside for potential borrowers is that they may be subject to higher rates and fees. 

• • Mortgage brokers: Brokers are third-party entities that serve as intermediaries between you and lenders. As mentioned, they have access to a wide range of product offerings thanks to their connections with lenders. However, this lending option may not be ideal for those who prioritize speed. Additionally, broker fees may also apply.

• • Direct lenders: As we’ve covered, they manage the entire mortgage process. They are transparent and quick with communications. This speed also applies to the application and approval process. However, they may have stricter criteria for potential borrowers compared to other options. 

How Does The Direct Mortgage Loan Process Work?

Understanding the direct mortgage loan process will help potential borrowers create a timeline and know what to expect as they move forward. Keep in mind that you may follow different steps based on the criteria and recommendations of individual borrowers. However, the general process is outlined as follows:

Pre-qualification

Gather the necessary documentation for the application process. This includes paperwork that demonstrates your creditworthiness, financial stability, personal and business financial statements, and other relevant documents. This information can help determine your eligibility for a direct mortgage loan. 

Application process

After receiving pre-qualification, you may submit a formal application. Be sure to include documentation such as financial statements, property data, and any other relevant information, including a business plan.

Underwriting

At this stage, the lender will examine the required documentation, including your business financials, property appraisal, credit report, and other relevant paperwork, to evaluate the risk. This can also influence the interest rates and terms that may be advantageous for you.

Approval and commitment

Once underwriting is complete, the lender will send you a loan commitment letter that includes the terms and conditions of the loan. 

Closing

This involves signing the necessary legal documents. After that, the funds are transferred to you, and the finalization process of the property transaction begins. 

Servicing

There may be direct lenders that offer servicing. In other words, they might manage the loan throughout its term. Keep in mind that some lenders may sell the loan after closing. Be sure to review any information about servicing before choosing a lender.

How to Choose a Mortgage Lender

Choosing the right mortgage lender can provide you with financial benefits and save you time. Moreover, it can help you avoid significant stress and frustration in the future. Let’s explore what to focus on when selecting mortgage lenders:

What are your objectives?

For those considering a commercial mortgage loan, there are several objectives to keep in mind. This may include a long-term fixed-rate mortgage or a construction-to-permanent loan. Reflect on your true goals before selecting a lender who can help you achieve them.

Evaluate the types of lenders.

While direct lender mortgages are the primary focus, consider other lending options if you might not qualify for these loans. Just because you may not be suited for direct lenders doesn’t mean all hope is lost.

Check the rates and terms.

These figures will be crucial when exploring your options for the best mortgage lender. This includes APR, fees, prepayment penalties, amortization schedules, and other factors. Interest rates should not be the only focus, nor should they be the deciding factor in your choice of lender.

Are they experienced in commercial properties?

The right lender may also be the most experienced when it comes to commercial properties. Working with one that has a proven track record will provide you with peace of mind, especially if they have knowledge and experience with such properties in the past.

Thoroughly look through their reviews.

Online reviews still play a significant role in shaping people’s decisions today. Therefore, take the time to thoroughly examine any you can find. Additionally, check their Better Business Bureau ratings and consider speaking with some of their clients if necessary.

Assess communication

Communication is essential for lender-borrower relationships. You should assess how responsive and transparent the lender is during your initial interaction. This will help you decide if they are dependable when you have questions or concerns about your loan.

It’s crucial not to rush through the process, even if you prioritize the speed of the application above all else. Take the time to evaluate which mortgage lender aligns with your needs and preferences, particularly if you are seeking a direct lender.

Frequently Asked Questions (FAQ)

Before we wrap up, let’s cover some common questions that people often ask direct mortgage lenders. These are typically asked by prospective owners looking for details on what their loan covers and other important information. Here are the questions we’ll cover:

What is a direct lender mortgage, and how does it work?

A direct lender mortgage comes directly from a financial institution, which typically oversees the entire process from application to full funding.

Are direct lenders better than mortgage brokers?

This may depend on your unique situation. Direct lenders are the best fit for you if your needs are mostly straightforward. Brokers typically have broad access to a wide range of loan products. If you prefer quicker service and fewer fees, direct lenders might be your best option.

Is it cheaper to go through a direct lender?

Believe it or not, yes. You might think that working with a mortgage broker is often the more cost-effective option. However, if you take a closer look, direct lenders frequently offer lower fees and better rates than what a mortgage broker can find for you (or possibly any other loan option).

How long does the direct mortgage loan process take?

While the time frame may differ, direct lenders generally process applications more quickly. Please note that commercial mortgage applications typically take between 30 and 60 days to close. However, factors such as the responsiveness of all parties involved and other complexities can have an impact.

What types of commercial properties qualify for direct lender mortgages?

These include office buildings, retail centers, hotels, multifamily apartments, and other commercial properties that may apply. However, they must meet the lender’s criteria. Keep in mind that not all lenders may encompass all commercial buildings as part of their requirements. For example, they may consider office buildings as a qualification, but exclude multifamily apartments. 

Can I refinance an existing commercial loan through a direct lender?

Yes. One of the main reasons existing borrowers can work with a direct lender for refinancing is the advantageous benefits. These benefits include better loan terms or even cash-out opportunities. However, you will still need to determine which direct lender best suits your needs or preferences.

Choose Penn Street Mortgage As Your Direct Lender

Penn Street Mortgage takes pride in offering mortgage services as a direct lender. We are committed to working with investors and business owners who are seeking opportunities to generate income, whether through tenant rent payments or revenue from their business. In either case, Penn Street Mortgage has experts ready to meet your mortgage needs.

Commercial properties, although they tend to be more expensive, can be financed with a loan that works best for you. For more information on how we can assist, please contact Penn Street Mortgage today, and we’ll be glad to help you.