Commercial Notes: The difference between commercial, residential mortgage brokers

Q. What’s the difference between a commercial and residential mortgage broker?

A. Residential mortgage brokers typically provide mortgage origination services to borrowers who are either acquiring or who already own residential property consisting of one to four units, condominiums, mobile homes or single-lot land parcels. Non-residential or commercial mortgage brokers will generally provide loan origination services for all commercial types of property and residential properties consisting of 5 units or more.

Residential mortgage brokerage as an industry is about 25 years old and has grown dramatically during that time. Commercial mortgage brokerage is an older industry that was predominantly limited to larger loans in major metropolitan areas until more recent times.

The general definition of a mortgage broker is someone who offers to act or acts as an intermediary, finder or agent of a lender or borrower for the purposes of negotiating, arranging, finding or procuring first mortgage loans or commitments for first mortgage loans. The New Hampshire Banking Department, which regulates the licensing of non-depository first mortgage bankers and brokers, only regulates “persons that engage in the business of making or brokering first mortgage loans secured by real property located in the State of New Hampshire which is or shall be occupied in whole or in part as a primary domicile or place of residence by the borrower and which consists of not more than 4 living units.”

Since first mortgage loans are defined as loans secured by property intended for use by not more than four families, residential mortgage brokers originating one-to-four family loans are subject to Banking Department regulations, whereas commercial mortgage brokers are not.

All companies originating residential first mortgages, whether banks, credit unions or mortgage companies, must be licensed by the state, and each individual residential mortgage broker must work under the license of a company.

In addition to state regulations, federal regulations govern residential mortgage activities, including RESPA (the Real Estate Settlement Procedures Act), which was established as a consumer protection guideline. RESPA applies to all one-to-four family mortgage loans and states, among other things, that costs of a loan must be disclosed to the consumer.

The residential mortgage broker directs consumers toward and navigates them through a diverse variety of loan programs that best fit the borrower’s affordability level, credit scores and financing requirements. They often prepare the loan application at the consumer’s home or business location and can provide almost instantaneous quotes and approval. Personal income is the usual determining factor for the loan amount, but sometimes other income, exceptional credit or low leverage (loan to value) can overcome personal income restrictions.

Mortgage brokers who originate mortgage loans for properties outside of the one-to-four family classification provide services to their clients in a somewhat different manner and are not required to be licensed by the state of New Hampshire. Usually the collateral and its cash flow are the most important considerations of the commercial loan transaction, and lenders have varying appetites for different types of loans. A commercial lender will be more competitive in the loan terms offered if the loan (collateral) type fits their portfolio makeup or origination strategy.

Commercial mortgage loan requests are typically submitted to a number of different lenders (usually four to six) to solicit loan quotes, commonly referred to as term sheets. The term sheets are compared against one another to determine the best combination of loan terms and conditions that meet the borrower’s expectations.

Commercial loan requests are analyzed by lenders very differently from residential loans. Residential loans are evaluated based largely on the credit and ability of the borrower to make the mortgage payments from their income, while the commercial mortgage lender seeks to confirm that the collateral can produce adequate income to repay the loan.

Commercial mortgage brokers also focus their efforts on understanding and evaluating the collateral and providing that information to the lender, whereas the residential mortgage broker primarily focuses on borrower issues.

David B. Eaton, president of Eaton Partners, Manchester, manages the firm’s Commercial Mortgage Group. Questions can be submitted to him at Commercialnotes@eatonpartners.com.