Why checking all the boxes doesn't always mean a done deal
Whether it is due to a tightening conventional market or due to an opportunity walking through a broker’s door, more residential mortgage brokers are starting to pick up more commercial loans.
Brokers who can float back and forth between residential and commercial loans will likely be able to weather any downturns in the market, as the commercial space typically is less rate-reactive than the residential space.
For residential brokers who might be considering picking up commercial loans for the first time, or for those who have just entered that space, there are some important factors to consider before agreeing to jump into that sector.
Terry Luker (pictured top left) and Jeff Luker (pictured top right), co-founders of the Commercial Loan Broker Association (CLBA), said there are a few things that residential brokers need to understand before starting their first commercial loan.
“I think one of the biggest things is that residential brokers understand debt-to-income, but they don't necessarily understand debt service coverage,” Terry Luker told Mortgage Professional America. “And a lot of times in commercial, we're looking to see, does that property cover the debt? Whereas a residential broker doesn't understand that.”
Understanding why deals fall through
Jeff Luker said that the timeline of a commercial loan is one of the biggest differences brokers will need to prepare to face.
“Time to close is probably the biggest difference,” Jeff Luker told Mortgage Professional America. “We closed an SBA deal a couple of months ago, and then the seller's agent and the buyer's agent were both residential brokers, and so they're trying to close a commercial property on a residential contract, and just the due diligence is longer.
“It doesn't mean there's a problem with the deal, but when your expectations are 45 days, and it's 120, they say, ‘This is crazy.’ But that's just the nature of commercial versus residential. So there's a lot of cross-pollination right now. We can provide a source that people can come to in order to figure out which avenue to take.”
Another issue residential brokers face when moving into the commercial space is that a commercial deal might look great to the broker, but the lender or investor simply isn’t interested.
“On the residential side, by and large, if you tick these handful of boxes, you qualify for a residential mortgage,” Jeff Luker said. “Maybe you don't like that rate, and you want to shop that rate, but if we tick these handful of boxes, we qualify. The commercial side is a lot different. You can tick every box, and a business development officer can really like your deal, but maybe that asset class isn't one that sits very well with his chief credit officer.”
That can be a frustrating process for residential brokers who are moving into the commercial space, because the same loan on the residential side almost certainly gets closed.
“Everything is perfect, it's a great deal, but Bank A turns it down just because the chief credit officer doesn't like it,” Jeff Luker said. “So we've got to go on to the next lender. From the broker's perspective, they're like, ‘Well, if it checks all those boxes, it's a deal. So there must be something wrong with the deal.’ No, the deal is fine. It just wasn't a fit for that particular bank.”
The lanes are narrowing
The CLBA recently announced a partnership with the National Association of Mortgage Brokers (NAMB). Terry Luker said the partnership makes sense because there have been a lot more brokers moving from one type of loan to the other.
“We see a lot of crossover,” Terry Luker said. “There are a lot of residential brokers who don't really have all the knowledge that they need. By joining together, we can provide more knowledge to the residential brokers. There are also a lot of commercial brokers – Jeff and I get calls all the time – who say, ‘Hey, can you help me with my home mortgage?’
“If we had a relationship with some residential brokers, we would just say, ‘Hey, contact so and so, they're going to take care of you.’ The reason we started all of this was that we saw that even the commercial loan brokers sometimes struggled with where to take a deal, and where to get a deal funded. With a residential broker, they have no idea, because they're not in it every day.”
Kimber White, president of NAMB, was also pleased with the new partnership.
“This partnership underscores our organization’s shared commitment to innovation and growth in the lending industry,” White said. “Together, NAMB and CLBA are expanding opportunities for brokers to enhance their expertise, build stronger professional networks, and better meet the evolving needs of today’s borrowers.”
The commercial sector can be a tricky space to navigate for brokers who are used to the rules and regulations in the residential space. That’s why the CLBA wants to help educate brokers on the critical differences.
“The residential and the commercial lanes seem to be narrowing and starting to come together more, and so I think that's why this is a good partnership,” Terry Luker said. “I think we all have our expertise, and we just want to help the residential brokers who want to learn and understand the commercial business a little bit better, and then offer our commercial brokers an avenue to learn the residential side of the business too.”
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