Being that for the past 20 years we have been specialists in complex mortgage financing in Toronto, we decided to write a series of articles, hoping to help other Mortgage Agents and Brokers get their complex mortgages financed. We are calling it the Toronto Mortgage Agent Handbook and this article will focus on commercial mortgage financing.
Commercial mortgage financing is very different in comparison to residential mortgage financing. Many lenders who offer residential mortgage financing do not offer commercial mortgage financing and many lenders who offer commercial mortgage financing do not offer residential mortgage financing.
Commercial mortgage interest rates are priced higher. The reason for this is that a commercial property is a greater risk to a lender than a residential one. It’s a greater risk because the number of individuals looking to purchase a residential property is much greater than the number of individuals or businesses who seek to purchase a commercial property. Also, because part of a commercial properties value is based on the income it can produce. If it is not producing income or other commercial properties in the area have leased their units for less, it will reduce the value of a commercial property.
The down payment/equity requirements to finance or refinance a commercial property are greater for the same reasons that they often bear a higher interest rate than a residential mortgage. Income verification requirements can also be more rigorous.
A commercial mortgage will require an AACI appraisal, which is a commercial appraisal that determines the property value using the 3 approaches to value. However, lenders typically place the greatest emphasis on the income method. An AACI appraisal is often 4-5 times more expensive than a residential appraisal and this is simply due to the complexity of the assignment. For example, a 5-plex would be considered a commercial property and would require an AACI appraisal. Part of its value would be determined by the rent it produces. If units in the 5-plex are vacant, the value of the property will be less.
Generally, Mortgage Agents will focus on a specific type of mortgage financing, most specialize in either prime or subprime residential mortgage financing. What do you do if someone applies for a commercial mortgage which is not your area of expertise? The answer is simple.
When you go into the mortgage business, just like it is important to establish a relationship with banks, and other lenders, it is just as important to establish relationships with other Mortgage Brokers who specialize in complex mortgage financing. Commercial mortgages often yield higher broker fees than residential mortgages. For example, if you establish a relationship with a commercial Mortgage Broker, one who specializes in Commercial mortgage financing, they can provide you with valuable information, such as:
1. How to pre-qualify for a commercial mortgage.
2. What to look for.
3. What to quote, if you think you have an applicant who qualifies.
At this point, if a commercial mortgage opportunity comes up, you can co-broker the deal and in many cases you will find that your half of the fees will be greater than what you would have earned on a residential mortgage. For more information about how to pre-qualify a commercial mortgage for maximum results please visit www.firstequity.ca or call David Mandel at 416-440-1224 ext. 22 to set up an appointment.
