Commercial Mortgage Training – Current
Commercial mortgage training is a general topic with many areas that need to be mastered in order for the commercial loan officer to be truly competent and successful. Among the more immediate needs is being able to screen deals. We see it all the time as hard working loan officers work on and submit loans that have no chance of closing as there is simply not enough income for the deals to cash flow and consequently fund. These loan officers are burning their cash and wasting their time.
The idea here is being able to really figure out what the total net income is and then calculate the debt coverage ratio. A lot has been written on how to calculate the Debt Coverage Ratio (DCR or DSCR). The basics of this ratio though is calculated by dividing the annual hypothesizedv mortgage payments by the net income that the character (in the case of an investment character) or the net income that the business produces (in the case of an owner occupied transactions). Net income meaning the income remaining after all expenses have been paid (like taxes, insurance, payroll, etc).
For example say the hypothesizedv loan amount is $1,000,000 and the monthly P & I payments are $10,000 per month or $120,000 per year. And say that the character is owner occupied and the business nets $15,000 per month or $180,000 yearly. By dividing the debt payments of $120,000 by the net income of $180,000 the hypothesizedv loan boasts a 1.5 debt coverage ratio, which by the way is strong. Most edges want to see a minimum of 1.2 to 1.3 for special purpose similarities.
The challenge here is trying to figure out what exactly the net income is. This can be difficult to calculate especially on owner occupied transactions. You have to be able to extract the income out of the borrower’s tax returns. And many borrowers will have 3 sets of tax returns to go by – personal, business and real estate entity which often is over 300 hundred pages. So in order for the commercial mortgage broker to figure out if the loan cash flows they will have to know how to read tax returns or they won’t really know if they are working on a viable deal or not. And they will waste many hours working on a loan that has no chance of closing.
The commercial loan officer does not need to get a degree in accounting but as implied above has to have a basic understand of what can and what cannot be used as income for a hypothesizedv commercial mortgage.