March 9th, 2013 11:23 AM by Chuck Green
One facet of commercial lending that gets very little attention is the fact that almost all commercial lenders look for their clients to have a certain amount of net worth. Generally this net worth needs to be approximately the same in size, or more - relative to the loan amount applied for. Some commercial lenders take this further and want double or even triple the loan amount in net worth.
We are seeing a high percentage of foreign investors coming in to the US looking for good investments, with multifamily apartments being of particular interest. Recently we have dealt with investors from Germany, France, the United Kingdom, China and Japan. What is not widely known is that most commercial lenders do not have any appetite for making commercial loans with foreign investors. The rationale for this is related to the net worth requirement mentioned above, and the on-going need for commercial investors to look for US collateral in a full recourse loan situation. In other words, an investor from Europe may not have much collateral in the US, and this defeats the purpose of trying to have the borrow act in a meaningful way as a guarantor. A foreign investor is any individual here on a visa, without permanent residency, with no green card. Foreign investors will help themselves greatly in terms of loan approval by having filed 3 years US taxes, having US bank accounts, some US credit, and possibly holding other US real estate assets.
Currently we have maybe four good commercial lenders (and two residential) who will work with foreign investors, under certain circumstances (see just above) and with a reasonably strong down payment (at least 30% down) in situations involving cash flowing stabilized investment properties in reasonably good condition in major US metropolitan areas. Note there are many private funds and private investors who will work with foreign nationals, but they offer only high rates and points.
Over on the residential side, we have a new lender who will allow a variant of stated income – true stated income programs being a thing of the past. These new programs require a great deal of liquid assets; and the assets are “imputed” (calculated via a formula) to be able to convert into an income stream as needed that can service the debt. This is a nice option for wealthy individuals who like to hide their income and sit on vast piles of cash. This cash “could be” (if needed) converted into a monthly draw to service the debt – and that is good enough for this lender.
Also on the residential side, we have a new lender who will provide purchase money second loans to enable the old 80-10-10 that we all relied on for so many years. This is a new program, and very few lenders have this option available. However, it is limited to major metro areas, and is limited in size (the first and second loans combined cannot exceed $750,000) and of course good income and credit are required along with seasoned funds for a 10% down payment. This program is also available as a piggyback second loan – holders of loans at the old high balance limit of $729,750 could in theory now split their loans into a $625,500 first (the new high limit for conforming) and a $124,500 second loan to take advantage of the better rates at the limit of $625,500.
Note however that we still have our 90% financing program for first time buyers available from one of our favorite lenders. This is a terrific program – buyers qualify on income, and while they need to make enough to qualify for the loan, they also cannot make “too much” income or they will not qualify for the program. Buyers need good credit, a seasoned 10% down payment (gifts are OK), good job history and credit history, but no reserves are needed and no PMI is required (usually PMI would be required for a 10% down payment). Buyers who qualify for this program will benefit from a rate improvement of 0.25 for a 30 year fixed rate, and the lender will cover many of the lender’s usual closing costs such as underwriting fees. The savings in PMI alone make this program much better than your typical FHA program; the only FHA advantage would be smaller down payment in most cases.