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Mixed-Use Mortgages and how they work!

January 22nd, 2009 1:39 PM

Mixed-use is a multiple unit real property with a commercial store or office on the ground floor and one to two residential apartments on the second or third floor. In order for a building to be considered a mixed use, the total commercial space cannot be more than 50% of the total square footage. Buildings with more space for commercial than residential use are financed with commercial mortgages.

Mixed-use mortgage is underwritten differently from residential mortgages. The income potential of the mixed use property carries the most weight in the underwriting process. The mortgage applicant's personal income, on the other hand, does not have to be used to qualify for the loan. Banks determine loan repayment capability by dividing the net operating income (NOI) after any vacancy factor, maintenance costs, taxes, insurance, utility costs, and management costs, by a Debt Service Coverage Ratio (DSCR). The DSCR used for loan qualification on mixed-use buildings is usually 1.25 to 1.3. For instance, a 3-unit mixed-use may have a combined annual rental income of $50,000, and net $36,000 after property tax, insurance, maintenance, etc. With a typical Debt Service Coverage Ratio of 1.25, banks would grant a loan with payments of no more than $28,800 ($36,000/1.25) annually, or $2,400 monthly. Knowing what the allowable monthly mortgage payment is, one can calculate what the maximum loan amount banks will lend on the mixed use building.

To determine the income potential of a property, banks hire a state certified appraiser to conduct an appraisal on the property. Included as part of the appraisal report is the "market rent analysis", which is the appraiser's opinion of the property income potential based on the local area rental market. Existing leases and current owner's expenses are also used to determine loan qualification.

Although personal income is not used to qualify for mixed use loans, the borrower's credit profile is an important qualification criterion. Mixed-use mortgage loan applicants must demonstrate a fair to excellent credit history.

Another factor banks scrutinize is the loan-to-value ratio (LTV). The LTV is calculated by dividing the loan amount by the purchase price or appraisal value, whichever is less. Although some banks will allow a combined LTV of over 90%, many only lend up to 80%, and allow other financing source or the seller to hold a subordinate mortgage to make up the difference. Banks often lend on higher LTV if the loan applicant uses the mixed use property as their primary residence and/or operates a business in the commercial part of the building.

Mixed use mortgages have slightly higher interest rates than residential mortgages. The reason being most conforming banks do not lend on mixed use properties. The secondary market for mixed use mortgages are smaller than the conforming loan market, and banks making mixed-use loans may have to hold on to the loan for its entire loan term.

Although mixed-use mortgages are available in Fixed Rate and Adjustable Rate, the most common is a hybrid of the two, with a fixed rate of 3 to 5 years, and adjusting once every 3 to 5 years for the entire term. 10-year, 15-year, and 25-year fixed rate mortgages are available.
Adjustable interest rates are most often tied to the London Interbank Offer Rate (LIBOR), the Prime Rate, or the U. S. Treasury Bill.

Posted by Nathan Kerpan on January 22nd, 2009 1:39 PMPost a Comment (0)

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