Question: What differentiates a commercial and residential mortgage broker?
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| Commercial Notes is a periodic publication of articles written by professionals at Eaton Partners, Inc. directed toward answering typically asked questions on the financing, leasing, acquisition, disposition and overall ownership of commercial real estate. |
Answer: There are two commonly referred to mortgage broker classifications, residential and commercial. However there is no statutory classification between the two within the New Hampshire Revised Statutes Annotated (NHRSA’s). Residential mortgage brokers typically provide mortgage origination services to borrowers who are either acquiring or who already own residential property consisting of 1-4 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 (NHBD), 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 4 families, residential mortgage brokers originating 1-4 family loan are subject to NHBD regulations, whereas commercial mortgage brokers are not.
All companies originating residential first mortgages, whether banks, credit unions, or mortgage companies, must be licensed under NH R.S.A. §397 and each individual residential mortgage broker must work under the license of a company. In addition to the state regulations, there are federal regulations that govern residential mortgage activities including RESPA (Real Estate Settlement Procedures Act) which was established as a consumer protection guideline. RESPA applies to all 1-4 family mortgage loans and states, among other things, that costs of a loan must be disclosed to the consumer. Personal service income (job pay) is the usual determining factor for the loan amount, but sometimes other income, exceptional credit or low leverage (loan to value) can overcome personal service income restrictions.
Mortgage brokers that originate mortgage loans for properties outside of the 1-4 family classification provide services to their clients in a somewhat different manner and are not required to be licensed according to State of New Hampshire regulations. Usually the collateral and its cash flow is the most important consideration 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 4-6) 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 upon 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. The commercial mortgage broker focuses 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.
In closing, although it may appear that residential and non-residential mortgage brokers would provide the same services and analyze the same types of criteria for presenting to potential lenders, in fact, mortgage brokers must approach the process for residential and commercial loans very differently and are not likely to easily cross over between the disciplines.
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