Loan Officer Training 08/22/2024 - How to Structure Mixed-Use Property Loans

In this episode of Loan Officer Training, we dive into the intricacies of structuring Mixed-Use Property Loans, a vital topic for loan officers dealing with properties that combine residential and commercial spaces. We’ll explore the unique challenges and opportunities presented by mixed-use properties, including how to assess the different components of the property and their impact on the loan application.

Learn about the key considerations for structuring these loans, such as determining appropriate loan-to-value ratios, evaluating income from both residential and commercial tenants, and understanding zoning regulations. We’ll also discuss best practices for working with borrowers and investors in the mixed-use space, and how to tailor your approach to meet their specific needs.

Whether you’re new to mixed-use property loans or looking to refine your skills, this episode offers valuable insights and practical tips to help you successfully navigate this complex area and provide exceptional service to your clients.

Tune in to gain the knowledge needed to structure mixed-use property loans effectively and enhance your role as a proficient loan officer.

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 22, 2024 • 11:06:26 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the mortgage calculator joined here by our president Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern on this show is go through a new loan officer training topic. And tonight we're going to be talking about a structured mixed use property loan. So I'll let Jose get right into the presentation. Again, if you have any questions, you can drop those in the chat. We can answer the questions after the presentation. Good evening, everybody. Thank you for joining us for tonight's training on mixed use properties. Uh, this is 1 of my favorite property types. Actually, 1 of my favorite loan types because frankly. There's very little competition, uh, in this niche, right? You've all heard niches, the riches are in the niches, right? Well, that's true for this one. And especially, um, for the product that I'm going to be highlighting today, which is a sort of a hybrid. Uh, mixed use loan, which, uh, requires a residential component, right? So this is not a, a true commercial, fully commercial mixed use where you have just different commercial property types within the same structure. This is actually a loan that requires at least 50%. of the space to be residential. And as you see there in the photo, they actually do require, which I'm going to get into it now, they do require the commercial component to be on the first floor and the residential component to be on the second floor and higher. So let's get right into it. It's pretty confusing sometimes when we talk about a mixed use two to eight unit property, right? Sometimes people think we're talking about it could be individual units, right? Put together into some kind of a portfolio, but it's not. We're actually talking about a specific property type like the one you see there in the photo. That, here we go. Sorry about that. I just realized I was looking at my stuff here. So let's get right into it again. How to structure our mixed use property. So when we're talking about a mixed use property, we're talking about the kind you see there in the photo where you see the first floor is commercial. Second floor and higher is residential. And that is actually a requirement for these mixed use properties. But what we're talking about here is one property folio that has multiple units. And for this, hybrid product that we have, you do have to have at least 50% Of these usable space, livable space, be residential. If you have less than 50 percent of the, spaces residential, then it would not qualify for this program, which has amazing interest rates when compared to a regular. Commercial mixed use property loan. So, this is though, since it does have a residential component, this is investment only. And this particular, and this particular option that we're talking about is, as you're going to see in the next slide, it's a DSCR loan, debt service coverage ratio. So this loan does not, Require any personal income for the borrower. It's simply going to use the gross rental income generated by the property. And you divide that by the housing expense, PITI and inapplicable association fee. And hopefully you're going to be above 1. 0. And actually for this best options in this program, you're going to be a 1. 1 or above DSCR, but it's very important to note again. The residential component has to be in the second floor and above. First floor can only be commercial. So the, the, the great thing about this program, like I was mentioning, is that it is a debt service coverage ratio loan and it does use, you know, DSCR guidelines. Minimum 1. 0, like I did mention, but we do have options at 1. 0 and above. Minimum 1. 1 actually for the best options. Now, do know this program is a little bit different than your regular DSCR in terms of the rent that they do consider. So please note that there, if there are current rentals in the property, underwriting, we'll use the lure of the current rent. on the appraisal or the market rent. So it would be either the current rent from tenants or the market rent from the 1007, but the lower value will be used. And likewise, when it's a refi, you will have to use the lower of the lease or the market rent on the appraisal. Now, you cannot have a totally vacant mixed use type property. And qualify for the loan. So it does have to have occupancy. Even if it's a purchase, it has to have occupancy. This is just, you know, one of the separate twists that they put on this program to also note that there. If there are vacant units, no, it doesn't mean you can't have some vacancy because you are allowed to have up to the 25 percent vacancy factor or vacancy 25 percent of the units can be vacant with eight units, you can have no more than. Two units vacant and the vacant units, depending on the percentage of vacancy, do get a haircut from anywhere from 10 percent to 25 percent of what would be the market rent for that unit. So you do get the vacant unit rent. They just cut it, right? So that's, that's the, the work around that they do, for this program. Now I will state here now, though, we do have, a mixed use option. That is a no ratio DSCR, but that one is more, that's more similar to a commercial, mixed use loan. I just threw it out there because you're going to see me mentioning 650 credit score as a possible minimum for some mixed use loans, which we do have, and it's the same, no ratio one, which is a more of a commercial mixed use, not as, the residential hybrid. Of, that we're talking about here, because one other very, very important note, I'm glad I started mentioning the commercial mixed use type loans, because whenever you do go to the pure commercial route, first thing they're going to ask you is, what's the address? What's the zip code? They're going to pop that zip code in and they're going to see what kind of demographics, what kind of numbers in general they get for that census track. What kind of population. And if the numbers don't work, and especially the population density, they're just not going to, they'll pass on the loan, regardless of if you have a 2. 0 DSCR, 800 credit score borrower, and a 50 percent LTV. They don't care if, that's on the commercial side mixed use, but on this residential, type hybrid product that we have, they don't, you know, they're not going to look at the zip code. They're not going to care about population density, but what they will care about. Is if the property is in a rural location and if the appraisal designates the property, excuse me, designates the property as being rural in nature. If it is deemed rural in nature, it's Pretty much a dead deal for this two to eight unit mixed use type loan. Because again, this is already a specialty product, a specialty products have a higher risk inherently associated with them. So they need to lower the risk factors by eliminating certain components. And definitely the rural component is totally eliminated from this one. Just like, needing the properties to the, uh, Not being able to have all vacant units when it's a purchase, for example, and definitely when it's a refi, just they need to lower the risk factor so that the loan packages can be sold. But definitely the fact that this is our hybrid product. And I, I guess I might as well spill the beans. Why this gets me so excited, because the fact is I just priced one of these out today. Out of this was a low LTV, it was a purchase, customers giving a big down payment. So I think it was gonna be like a 55% LTV. And the interest rate was, you know, depending on the closing costs that the customer wanted to pay. The interest rate was anywhere from 7.125. To eight percent. So the, you know, so depending on if they wanted a zero discount point rate or they wanted to pay one or two points, then they could get it. I think at 1. 25 points, it was like a 7. 125 with a 55 percent LTV customer had a seven, 10 credit score. So you go to a commercial conduit with the same loan, and it's going to be nine and a half, nine and three quarter, 10, 10 and a quarter percent. With, higher costs associated as well for the borrower, because in this particular case, we are the lender. When it's a commercial loan, we are the broker and we always get better deals when we're the lender. So I already, hinted on it, but let's talk about eligible borrowers and property types. Now I already mentioned two to eight unit properties with at least 50 percent of the space as residential. So. Minimum of 400 square foot per unit. You know, can't have a little tiny units. Each unit needs to have a full kitchen and bathroom. It can be a studio, but a studio has, you know, has a kitchen, full kitchen and a bathroom. It can't be like a boarding house, right? Where you've got a bunch of bedrooms, they share bathrooms, or maybe just share a common kitchen. They may have their own suite. You know, bedroom with a bathroom, but no kitchens, they, they got to have at least 400 square foot, full kitchen, full bathroom, a minimum two stories. Like I already mentioned, it's not every single type of commercial or a component is allowed. For example, no ALS, no daycare, no nursing home, no manufacturing, no worship, no gambling, no smoke shops. No, like, Dirty type business that can cause contamination, like a laundromat where they actually do the cleaning on site, do the dry cleaning on site. Should I say, that, that wouldn't be, possible. It has to be like a clean type business, you know, retail professional office. They're, they're allowing restaurants now. So, you know, to have the, an idea now, the present use of the structure, Has to be the highest and best use and typically it is going to be the highest and best use when you're looking at a commercial property that has residential and commercial is going to be a higher and better used. And if it's just purely residential, I already mentioned cannot be rural, for this particular option that we're talking about, the max LTV on a purchase is 75%. And the max LT V on a cash out is 70%. Now, it's minimum six 60 credit score for our hybrid option. Obviously that's not gonna be at 75% at a six 60, it's probably gonna be like 65 or 60%, something like that. But the minimum six 50 score that you see there is possible. Still at a 75%, just, you know, much higher interest rate, a little bit higher cost. But it is possible 75 percent LTV with our commercial option for the mixed use, even if it's residential and commercial mixed use, like we're talking about here, we're still able to do it at a 650 credit score. Keep that in mind. Eligible borrowers, U. S. citizens, U. S. permanent resident non permanent resident aliens. We would have to check if they allow for nationals on a case by case situation, because it may be that they allow the foreign national if they have us based credit, but again, the situation with this Sloan type, again, it is more of a specialty product. So, uh, whereas we do have four national loans for DSCR, uh, that's not necessarily the case for this hybrid product that we have. Uh, entities, again, uh, this is what you would want this to be a business purpose loan closing in an entity. The most common entities are LLCs, C Corp, S Corp. and limited partnership. All right, last but not least here, wanted to share with you investor experience and housing history. Again, this is, this is not for first time home buyers, but first time investors will be allowed with an LTV reduction. I believe we can do up to 70 percent for a first time investor. Uh, the best options at the Maxell TV are going to require at least one year investor experience in the last three years. So again, uh, a lot of opportunities here with these mixed use loans. This is a great niche that I recommend, uh, everyone to add. To their, uh, niches of loans that you want to originate. Don't stay just inside the box and want to originate just, uh, agency loans or just, you know, bank statement loans, but, you know, get out there. Uh, because when you do find the investor that, uh, is interested in one of these loans, they don't really have the money. that many options to go to. And they're definitely, uh, if you give them one of these rates, like what we're talking about here, uh, seven and a half, eight percent, uh, there's a good possibility you're going to get that low, right? So, uh, definitely want to recommend everybody to hit the mixed use loans. Now, I want to see if there's any questions out there. Because, I mean, this is, uh, if anyone has any questions, this is a time for it because the mixed use loans, very unique property type, especially, uh, this one that we're offering here, which is DSCR percent of the units residential. Well, I don't see any questions, so I guess we'll go ahead and wrap it up then. Uh, great stuff though. So, remember that we do this every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern, where we go through a new Loan Officer Training topic. So, we'll have some new topics for you next week. We'll see you next Tuesday, 7 p. m. Eastern, for the next episode of the Loan Officer Training Series, but