Mortgage brokers should focus on key loan programs if they want to make money in the current credit environment. “I am regularly asked by mortgage brokers, borrowers and bankers to provide guidance on what type of loans can get closed in the current tight credit environment,” said Michael D. Sneden, Executive Vice President of ValueXpress. “In general, the loans that are getting done have some level of government support, so mortgage brokers should take advantage of the government sponsorship while it is being offered.”
Here is a list of the “hottest” loan programs and why deals are getting done in these programs. Let’s start with the “hottest.”
The SBA 7(a) program is the hottest loan program right now. The 7(a) program used to be the dumping ground for poor-quality loans, but no more. Since the Obama Administration waived the 3.0%-3.5% guaranty fee and increased the guaranty from 75% to 90%, this program has been on fire. Another positive influence is that the secondary market for the sale of the guaranty is very active, and premiums as high as 10% are being routinely achieved. With conventional balance sheet lenders (mainly community banks) pulling back on non-guaranteed originations, the SBA 7(a) program is finding less competition.
So what qualifies? Brokers should find owner-occupied real estate properties in which the owner’s business occupies at least 51% of the real estate. Investment properties do not qualify for the SBA 7(a) program. The loan amount cannot exceed $2 million so do not solicit loans for more. The program is geared toward purchases, but refinances that benefit the borrower are acceptable. All owner-occupied real estate qualifies, although more general-purpose buildings are desired. Underwriting is based on the tax returns for the business that occupies the real estate. The business must show a 1.20x DSCR. LTVs usually top out at 80%. Nearly all SBA 7(a) loans are floating rate.
If your owner-occupied loan is over $2 million, then look to the USDA Business and Industry (B&I) loan guaranty program. This program is similar to the SBA 7(a) program as the government provides a loan guarantee, typically 80% (but up to 90% under the Obama stimulus program, although funds for the 90% guarantee have currently run out). Loans up to $10 million or more are possible. The program charges a 2% loan guarantee fee that had been recently waived, but until this part of the stimulus program gets extended, the fee is in place. Before getting too excited, run the address of the property through the USDA website to determine if the location qualifies for the program. All owner-occupied real estate qualifies, as do income properties (although the project is “scored” and job creating/retaining projects generally get priority), although more general-purpose buildings are desired. Underwriting is based on the tax returns for the business that occupies the real estate. The business must show a 1.20x DSCR. LTVs usually top out at 80%. Most B&I loans are floating rate.
If your client needs multifamily financing, the HUD 223(f), Fannie Mae and Freddie Mac loan programs still provide up to 80%-85% financing on multifamily properties. The HUD 223(f) program’s generous terms of 85% LTV and 1.18x debt-service coverage are providing more proceeds than any other multifamily loan program. Current rates of 5.25% including the ongoing guaranty fee are very attractive. Plus the loans are 35-year self-amortizing, eliminating balloon refinance risk. Fannie Mae and Freddie Mac have fewer fees than the HUD 223(f) for borrowers who are fee conscious. Fannie and Freddie will provide up to 80% financing at rates well under 6%. But Fannie will not provide high LTV in the Pre-Review States of Ohio, Michigan, Indiana, Nevada and Florida. Pre-Review MSAs are New Orleans, Houston, Cincinnati, Phoenix, Atlanta and the Inland Empire of California (Riverside/San Bernardino Counties). Therefore, HUD 223(f) is a better fit in these geographic areas.
Beyond these options are SBA 504, conventional commercial loans and CMBS conduit loans. The common theme here is the first mortgage component of SBA 504 loans and all of the other options have no government support. Although lenders are active, LTV is generally limited to 65% (50% on SBA 504, but you can still achieve 90% overall leverage with the SBA 504 second mortgage in conjunction with the conventional first mortgage). So for these loan programs to be effective, you need a low-leverage borrower.