With banks focused on income to establish lending credentials, the commercial real estate sector is facing increased challenges. To solve that requires different financing solutions, and even new approaches to finance altogether.
Credit Unions vs. Banks
Another way of circumventing the new challenges in financial lending is to seek alternative lenders. Credit Unions have bene around for many years, but are once again gaining in popularity. A non-profit organization, credit unions are designed to provide members with low cost borrowing options. While banks must generate profit for shareholders, credit unions are focused on value for their members, and that means in general, lower interest rates and cheaper finance over the life of the loan.
Credit unions are also regulated by the National Credit Union Administration (NCUA), which is an independent federal agency, so have similar safeguards to banks too. So, with lower fees, cheaper lending and adequate oversight, why is anyone using banks at all? Credit unions tend to have a smaller range of lending products compared to banks, so if you need lending outside of the normal criteria, a bank may be your only choice. The other issue is that wherever you are in the country, you will have a choice of local or national banks. However, credit unions are community based, built by and for their members. As a result, there may not be a credit union nearby for you to use.
However, if a credit union is an option, it is definitely one to pursue.
B Lender Mortgages can be more flexible, with the lender offering different financing options to overcome specific issues. For instance, for projects where a traditional mortgage payment is too high, interest only mortgages may be available. Here, payments are significantly reduced by only paying the loan interest, however this also means the capital value of the loan outstanding never goes down. At the end of the mortgage term, that capital must be repaid though, however for many business projects the ability to reduce early outgoings and repay the capital later can be extremely advantageous.
Lending Criteria
As economic conditions have tightened, there is no question that lending criteria have followed suit from category A lenders, most commonly banks. Financing is becoming much more difficult to obtain through banks with a double hit, as not only do they set stringing income requirements, but also expect larger deposits too. For businesses, this means more cash down, but as interest rates rise, payments are increasing too.
Vendor Take Back Mortgages
One unique type of mortgage available to combat the pressure of changes to lending criteria is the Vendor Take Back Mortgage. In this scenario, the vendor, or seller, of the property, extends a loan to the buyer to allow the sale of the property. The loan will be for a certain portion of the sale price, how much will depend on the situation, with the seller retaining a proportionate amount of equity in the property in return, until the loan is paid in full
This approach is valuable in that it overcomes situations where buyers are simply unable to obtain finance for the full amount of the property value, or cannot cover the higher down payment requirement from the lender. The seller still gets their sale, and ultimately, will also receive the expected asking price over time. During the loan period, the seller retains equity value in the property itself to match the outstanding balance. With interest payable on the take back mortgage, the seller can see extra value on the eventual return too.
B Lender Mortgages
B lenders offer an alternative source of financing to the more traditional A lenders such as banks we are most familiar with. While banks and other A lenders are regulated directly by federal organizations, B Lenders are quasi-regulated instead. They are not directly overseen by federal government, but follow the same rules. B lenders include Mortgage Finance Companies (MFCs) among others, and may offer suitable finance if you are unable to secure a loan through more traditional sources
There are some limitations on B Lender mortgages though, with restrictions on the payment amounts in relation to income. Currently, this means no more than 39% of income can be taken up by debt repayment costs. In addition, these interest only mortgages require an insurance policy to cover the loan amount, which can range from 0.6% of the loan to as much as 4% of the loan in premium costs.
All-Inclusive-Mortgage (A.I.M.)
Lending Criteria
As economic conditions have tightened, there is no question that lending criteria have followed suit from category A lenders, most commonly banks. Financing is becoming much more difficult to obtain through banks with a double hit, as not only do they set stringing income requirements, but also expect larger deposits too. For businesses, this means more cash down, but as interest rates rise, payments are increasing too.
With banks focused on income to establish lending credentials, the commercial real estate sector is facing increased challenges. To solve that requires different financing solutions, and even new approaches to finance altogether.
Vendor Take Back Mortgages
One unique type of mortgage available to combat the pressure of changes to lending criteria is the Vendor Take Back Mortgage. In this scenario, the vendor, or seller, of the property, extends a loan to the buyer to allow the sale of the property. The loan will be for a certain portion of the sale price, how much will depend on the situation, with the seller retaining a proportionate amount of equity in the property in return, until the loan is paid in full.
One unique type of mortgage available to combat the pressure of changes to lending criteria is the Vendor Take Back Mortgage. In this scenario, the vendor, or seller, of the property, extends a loan to the buyer to allow the sale of the property. The loan will be for a certain portion of the sale price, how much will depend on the situation, with the seller retaining a proportionate amount of equity in the property in return, until the loan is paid in full.
This approach is valuable in that it overcomes situations where buyers are simply unable to obtain finance for the full amount of the property value, or cannot cover the higher down payment requirement from the lender. The seller still gets their sale, and ultimately, will also receive the expected asking price over time. During the loan period, the seller retains equity value in the property itself to match the outstanding balance. With interest payable on the take back mortgage, the seller can see extra value on the eventual return too.
Credit Unions vs. Banks
Another way of circumventing the new challenges in financial lending is to seek alternative lenders. Credit Unions have bene around for many years, but are once again gaining in popularity. A non-profit organization, credit unions are designed to provide members with low cost borrowing options. While banks must generate profit for shareholders, credit unions are focused on value for their members, and that means in general, lower interest rates and cheaper finance over the life of the loan.
Credit unions are also regulated by the National Credit Union Administration (NCUA), which is an independent federal agency, so have similar safeguards to banks too. So, with lower fees, cheaper lending and adequate oversight, why is anyone using banks at all? Credit unions tend to have a smaller range of lending products compared to banks, so if you need lending outside of the normal criteria, a bank may be your only choice. The other issue is that wherever you are in the country, you will have a choice of local or national banks. However, credit unions are community based, built by and for their members. As a result, there may not be a credit union nearby for you to use.
However, if a credit union is an option, it is definitely one to pursue.
B Lender Mortgages
B lenders offer an alternative source of financing to the more traditional A lenders such as banks we are most familiar with. While banks and other A lenders are regulated directly by federal organizations, B Lenders are quasi-regulated instead. They are not directly overseen by federal government, but follow the same rules. B lenders include Mortgage Finance Companies (MFCs) among others, and may offer suitable finance if you are unable to secure a loan through more traditional sources.
B Lender Mortgages can be more flexible, with the lender offering different financing options to overcome specific issues. For instance, for projects where a traditional mortgage payment is too high, interest only mortgages may be available. Here, payments are significantly reduced by only paying the loan interest, however this also means the capital value of the loan outstanding never goes down. At the end of the mortgage term, that capital must be repaid though, however for many business projects the ability to reduce early outgoings and repay the capital later can be extremely advantageous.
There are some limitations on B Lender mortgages though, with restrictions on the payment amounts in relation to income. Currently, this means no more than 39% of income can be taken up by debt repayment costs. In addition, these interest only mortgages require an insurance policy to cover the loan amount, which can range from 0.6% of the loan to as much as 4% of the loan in premium costs.
