In the world of commercial real estate financing, small balance commercial loans play a critical role by offering unique financial solutions to a specific segment of borrowers. This in-depth guide will navigate you through the basics of small balance commercial lending, the innovative programs, and flexible requirements.
What are Small Balance Commercial Loans?
Small balance commercial loans, typically defined as transactions less than $5 million, are financing solutions for commercial real estate properties such as multifamily, mixed-use, office, retail, warehouse/light industrial, self-storage, mobile home communities and other similar property types. They are specially designed for borrowers overlooked by traditional lenders due to the small loan amount or credit challenges.
Why Choose Small Balance Commercial Loans?
Small balance commercial loans offer several significant benefits:
- Less Complicated Process: Compared to the complex application and closing process of large-balance commercial lenders, small-balance lenders offer a simplified process, making the approval process much easier.
- Flexible Underwriting Guidelines: Small balance commercial loans provide a natural progression from residential lending. They are ideal for individuals turned down by banks due to loan size or credit challenges.
- Quick Closing: With lighter underwriting and streamlined processing, small balance commercial loans can get you to closing faster than traditional lenders.
- Property Diversification: Small balance commercial loans allow borrowers to diversify their real estate holdings across multiple asset types, or to access equity in their current portfolio and turn it into liquidity.
Types of Small Balance Commercial Loans
Depending on the level of documentation that borrowers can provide, small balance commercial loans come in various types:
- No Documentation Loans: Under this program, borrowers do not have to provide any documentation to verify their income.
- Bank Statement Loans: This program requires borrowers to provide bank statements instead of traditional income documents.
- Light Documentation Loans: Also known as the Lite Doc program, this loan type requires more documents than the first two programs, but still does not require borrowers to submit tax returns.
- Full Documentation Loans: For borrowers with complete documents, the Full Doc program comes with the best terms and interest rates because lenders face lower risks.
Eligible Properties for Small Balance Commercial Loans
Small balance loans can finance all commercial property types, from traditional ones such as offices, warehouses, and multi-family to higher-risk properties that are typically rejected by traditional lenders. The property types include but are not limited to:
- Multi-family (5 units or more)
- Office buildings
- Light industrial
- Self-storage and warehouse
- Hotels and motels
- Mobile home parks
- Special-purpose properties
Key Factors in Small Balance Commercial Loan Approval
The approval of small balance commercial loans primarily depends on three factors. These include property cash-flow, borrower creditworthiness, and overall capacity to service the proposed debt.
Non-Resident Aliens and Small Balance Commercial Loans
Some lenders allow non-U.S. citizens to apply for small balance loans, including foreign nationals. These lenders have proven expertise and extensive experience in tailoring mortgages to the unique needs of non-resident aliens.
Role of Mortgage Brokers in Small Balance Commercial Loans
Most small-balance commercial mortgage lenders work through mortgage brokers, not directly with borrowers. Therefore, borrowers should contact a mortgage broker who can recommend the best loan options for their specific needs and guide them throughout the process.
Small balance commercial loans are a crucial component of the commercial real estate financing landscape. They offer flexible, creative, and strategic financial solutions for a specific segment of borrowers who are often overlooked by traditional lenders. By understanding the basics of small balance commercial loans, borrowers can make informed decisions and benefit from these innovative financing solutions.