Finding the right kind of loan is important. Finding the right kind of lender is as much important too. To make the most out of commercial real estate investing, it is crucial to have the right mix between the perfect loan and a perfect lender.
While deciding the right kind of loan is super crucial in determining how much you’ll actually end up making from a deal, deciding the right kind of lender too is important to determine how much you’ll save and how your further real estate investing business would move on in the future.
Many successful Commercial real estate investors often do accredit a significant portion of their success to their lenders and believe that building great relationships with the commercial real estate lenders can help you immensely in the long run, not just in securing the required loan on time, but also in terms of getting timely and valuable real estate advice.
Because at the end of the day, commercial real estate lenders have huge experience in the real estate market and having great relationships with them will surely come a long way in helping you decide and choose the real estate transactions you want to get involved in.
Bottom-line: Choosing the right kind of commercial real estate lender is very important and as a smart investor, you shouldn’t be making any mistakes in this regard.
Doing your homework and research well in prior, in this regard saves you a lot of time wastage, frustration, and other resources. We’ve put together all you need to know about the different types of mortgage lenders out there.
Knowing all the different types of lenders out there will surely help you when you’re narrowing down your options and finally choosing the best mortgage lender to work with. Read on.
Also read, How to find trusted commercial mortgage brokers.
Different types of Mortgage Lenders
First things first. Before talking about the different types of mortgage lenders out there, let’s look into the differences between a mortgage lender and a mortgage broker as many people often tend to confuse with these terms and use them alternatively.
There’s a huge difference between a mortgage lender and a mortgage broker and one should NOT use them interchangeably. Here’s the difference.
The BIG difference between a mortgage lender and a mortgage broker
Who is a mortgage lender? – A mortgage lender is a financial lending institution or a mortgage bank that offers and provides home loans. They have a specific set of guidelines and qualification requirements that needs to be fulfilled by the borrower.
They have a set of techniques and yardsticks which determines the credit-worthiness of a borrower along with his loan repayment abilities, which they use before deciding whether or not to process a particular loan request.
Mortgage lenders set the loan terms, interest rates, repayment periods and everything related to the loan liabilities of a borrower. Who is a mortgage broker? – A mortgage broker, on the other hand, works as an intermediary between the mortgage lenders and you.
They do not have any control over the loan terms, repayment schedules or patterns, and do not determine whether or not your loan request will be approved by the mortgage lenders.
They simply facilitate the process of loan hunting and they usually also provide great consultation on the kind of loan you must be buying for a given financial situation.
They often work for big Commercial real estate mortgage companies and hence, they’ll have a huge list of potential mortgage lenders you can shop around. Most mortgage brokers often go around and shop for the best loan deals for their clients and do all the paperwork needed to facilitate the process.
Some brokers also extend their services beyond this and offer highly valuable real-time Commercial real estate advice to their clients.
Put it simply: Commercial real estate brokers have nothing to do with the final loan that you choose to buy. They’re the intermediary who will make the task easier for you.
They often charge fees from the mortgage lenders. In rare cases, borrowers cover their fees upfront when the loan request has been approved by a potential lender. That said, let us look at the different types of mortgage lenders out there you can choose from:
1) Retail Lenders
Retail lenders are mortgage lenders that provide loans directly to the end consumers and not to institutions.
Some examples to retail lenders are banks, mortgage bankers and credit unions. In most cases, retail lenders also provide additional services like maintenance of bank savings accounts and issuing personal loans and auto loans.
When it comes to commercial real estate loans, retail lenders are the perfect fit only for some specific types of financing needs. They usually cover small loans and shorter term periods. Consulting a commercial real estate expert before deciding the type of lender is important for ensuring that you’ve made the best pick.
2) Portfolio mortgage lenders
Portfolio lenders are mortgage lenders who provide loans catering to the specific types of financing requirements a real estate investor would have, funding it by their own funds.
Since they provide loans sourcing it from their own finance, they are not beholden by the interests of any outside parties. They define their own set of borrowing terms and conditions, qualifications and requirements.
This makes them some of the best go-to options as some borrowers are specifically looking for lenders whose loan terms are very flexible.
They suit perfectly for those investors who plan to invest in commercial real estate investments for longer periods of time. In such cases, having a great relationship with the lender comes a long way.
There are cases of highly successful Commercial real estate investors who have stuck around with the same portfolio lender from day 1 until they built a massive portfolio of real estate investments.
Portfolio lenders too, choose to work with long term clients who take real estate investing very seriously and who try to get the best deals, with the vision of being a savvy Commercial real estate investor over time.
Also read about – Pros & cons ofCommercial Real Estate Mortgage Bridge Loans
3) Direct Lenders
Direct Lenders are mortgage lenders who originate their own loans. Meaning, they rely on their own funds or take the responsibility of taking loans from outside parties under their own names in order to provide you the funding you need.
Mortgage bankers and the portfolio lenders can be direct lenders too. But in the commercial real estate lending lingo, more often than not, when someone says direct lenders – they mean to point at the lenders who originate their own loans AND who have a specialization in providing home loans, over kinds of loans.
Direct lenders aren’t really the best go-to options for borrowers who are looking to trade in commercial real estate investing for long periods of time.
4) Private Commercial real estate lenders
Private commercial real estate lenders are private lending agencies or individuals who originate their own loans, either from their own reserved income they have set aside or from other lending agencies.
The reason private Commercial real estate lenders are the best is their flexible lending conditions and their not-so-stringent lending policies. It is often said that, when banks and other more traditional forms of commercial real estate lenders shut their doors on you, private Commercial real estate lenders are the best option!
What makes them unique is that they do not care as much about the credit-worthiness of the borrower or their previous lending histories. What they do care about is a good Loan-To-Value ratio at which a borrower is ready to buy their loan for and the equity a borrower has in the property.
And it goes unsaid that since they’re giving up on checking and caring as much about the previous loan repayment history of a borrower, they charge higher rates of interest than their other more traditional counter peers and also demand a substantial amount of down payment in order to seal the deal.
They are the best go-to options for people looking to avail Commercial stated income loans. Private lenders are also among the majority of commercial real estate bridge loan lenders.
5) A commercial real estate hard money lenders
There’s a very thin line of difference between private Commercial real estate lenders and Commercial real estate hard money lenders.
The significant difference between the two is that private Commercial real estate lenders have been around since a while and most of these agencies are reputed and have vast clientele, including some of the most influential and powerful commercial real estate investors.
On the other hand, hard money lenders are usually individuals with a good cash reserve that they intend to lend, and have very loosely structured loan options demanding no income verification whatsoever from the potential borrowers.
They generally get business through word-of-mouth publicity and do not really swear in by the marketing and advertising channels to bring them business. Put it simply, hard money lenders do no stay in the spotlight and are not as mainstream as the private Commercial real estate lenders.
Sometimes, people do regard private lenders and hard money lenders to be one and the same as the only major difference really – lies in the nature of business doing, where hard money lenders are perceived to be the ones dealing with transactions under the table or behind the curtains.
They are again, just like private lenders, best go-to options for people looking to avail both commercial stated income loans or Commercial bridge loans, where the borrower has a poor credit score and a shabby loan repayment history.
That was a brief account on different types of mortgage lenders. Remember to consider the type of loan you want to avail that perfects your specific commercial real estate financial need before you get started with choosing the lender.
Reason? You can decide well on the type of lender you want to work with once you have clarity over the type of loan you want to avail because different types of Mortgage Lenders specialize in different types of commercial real estate loans.