Net worth must be equal to loan amount?

Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes

Hi guys I'm new here but I've been puzzled over this question for a while. If commercial mortgages require that the investor have a net worth equal to or greater than the loan amount than isn't the idea of a 30% downpayment ridiculous? the real downpayment would really be 100%? Say someone had a $120,000 to invest, most real estate gurus would say that you could obtain a 400,000 mortgage right? Well not really because if the bank requires your net worth to be equal to the loan amount than you could only borrow $120,000.

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Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

10y

You're being mislead. You're purchasing power is determined based on a lot of things and the asset type you are purchasing as well as the type of financing you are obtaining. This is the quick response:

For Conventional type (loan in your personal name) with 1-4 family you will be getting a loan based on credit, income and debt to income ratio. This type of loan you can get 40% of your income and sometimes more if you're a strong buyer. You typically can get the deal done with 20% or less down payment

For commercial loan 1-4 family your loan will be based on nearly the same standards as conventional, however they also look at the asset performance or projected performance. The bank may base the loan amount on your net worth as well in this scenario depending on the borrower.

For Commercial loans with 5+ unit deals or other commercial assets your loan will be based on your financials and the property performance. This is likely where net worth will come into play. Most banks want to see a net worth close to the loan amount. If, however, you have an extremely high income from your job they may look past a low net worth. Afterall, if you make $500k/year and have a low debt to income, you should be able to cover some pretty good loan payments.

If you are looking at buying, figure out your goals and call local banks. Ask for a mortgage lender and discuss with them your options.

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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
10y
You're being mislead. You're purchasing power is determined based on a lot of things and the asset type you are purchasing as well as the type of financing you are obtaining. This is the quick response:
For Conventional type (loan in your personal name) with 1-4 family you will be getting a loan based on credit, income and debt to income ratio. This type of loan you can get 40% of your income and sometimes more if you're a strong buyer. You typically can get the deal done with 20% or less down payment
For commercial loan 1-4 family your loan will be based on nearly the same standards as conventional, however they also look at the asset performance or projected performance. The bank may base the loan amount on your net worth as well in this scenario depending on the borrower.
For Commercial loans with 5+ unit deals or other commercial assets your loan will be based on your financials and the property performance. This is likely where net worth will come into play. Most banks want to see a net worth close to the loan amount. If, however, you have an extremely high income from your job they may look past a low net worth. Afterall, if you make $500k/year and have a low debt to income, you should be able to cover some pretty good loan payments.
If you are looking at buying, figure out your goals and call local banks. Ask for a mortgage lender and discuss with them your options.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
there is no correlation vis a vi net worth and loan amounts.
FICO
CASH reserves
Experience
those determine your ability to borrow in most instances down payment being a given
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
In my market, commercial lenders are looking for net worth >= loan amount (will vary by bank and borrower). The Fannie and Freddie SBL programs require it as well (see attached for term sheets).
https://www.greyco.com/wp-content/uploads/2016/03/...
https://www.greyco.com/wp-content/uploads/2016/03/...
Below is a post on the Freddie SBL program, which includes the net worth requirement.
https://www.biggerpockets.com/forums/432/topics/31...
It's my understanding that many investors bring on partners or key principals to help meet the net worth and experience requirements, if needed.
copying @Eric Schleif and @james eng
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Eric Schleif
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Mike Dymski already pointed out the Freddie and Fannie Small Loan Program guidelines for a Borrower's net worth and liquidity. I will note these are guidelines and not set in stone. You can get a waiver from them under certain circumstances. We've done that a few times this year alone. These programs are for loans in the $1MM to $5MM range. I've found that the smaller local lenders defer to something similar in underwriting their deals, but each market is different. Also you need to keep in mind that underwriting a borrower for $400K multi-family loan and a $10 million multi-family loan are 2 totally different things.
I also agree with @Jay Hinrichs. I think a lot of people get caught up in exactly what lenders will require in terms of liquidity and net worth numbers when underwriting the Borrower. What lenders really care about is:
Do you have enough money for the down payment?
Do you have enough cash in reserve (after your down payment) to carry the building in case a problem arises that constricts cash flow?
Do you have experience with the type of asset you are purchasing?
Is the rest of your real estate portfolio performing and cash flowing?
How's your credit look? Do you have any bankruptcies? Do you have any judgements? Any ongoing lawsuits or criminal proceedings? Any foreclosures?
The questions go on but you get the idea. And don't think that you have to fit perfectly in a bank's underwriting box for them to be able to lend to you. It's just a matter of the lender understanding who their borrower is and getting comfortable from a risk and credit standpoint. Case in point, we just scheduled a closing next week on a great bank deal for a client who had a foreclosure a few years ago.
Best of Luck.
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Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Todd Dexheimer If i was making 500k a year I probably wouldn't be asking these types of questions :)
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Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Eric Schleif If someone had a job making 60k and owned 2 duplexes cashflowing 20k/year would the bank count that income has additional income needed to qualify for more purchases?
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Eric Schleif
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Chris Pochari I'm not the right guy to answer that. I underwrite/broker/place commercial loans with a minimum loan amount of about $2MM and an average deal size closer to $12MM. Borrowers on deals this size are being reviewed financially on liquidity, net worth, and Real Estate Owned (REO) schedules, not so much on salary and DTI ratios.
Sub $500K loans are not something I can provide valuable insight on.
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Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Eric Schleif Ok thank you, I have another question. If I had 1 million in equity and wanted to use that as a downpayment for a 3 million dollar apartment could I do that?, or would I need a partner who has a net worth of at least 3 million? Assuming I had enough experience and necessary cash reserves.
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Eric Schleif
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Chris Pochari Yeah that would work.
1 Reply
Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Eric Schleif So even if I didn't have a partner with a 3 million net worth I could still buy a 3 million apartment with a million in equity?
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Andrew Cushman
Apartment Syndication · Southern California · Member since 2015 · 71 posts · 194 votes
10y
@Chris Pochari, keep in mind that your net worth is far more inclusive than the amount of cash you have available for investment. To use your example, let's say you have $120k cash to use as a downpayment. But you also have a $300k retirement account, a $20k vehicle, $10k stashed in a mutual fund, $75k in equity in another rental property, and $25k in other misc assets. Your net worth is $550k. So, generally speaking, you can put $120k down and get a loan up to $550k on a 5+ unit multifamily property.
If you don't have the necessary net worth, you can get around that by getting a loan sponsor. They effectively become part of the sponsoring entity so that the total net worth exceeds what is required. I have several partners that I work with, and one of their main functions is providing a strong balance sheet so we can get large commercial loans. In most cases I will even pay them a loan guarantor fee, even if the loan is non-recourse. The fee is just an expense of doing the deal.
Andrew
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Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Andrew Cushman but isn't that strange accounting? that means it's really a 100% downpayment! If you can only borrow up to the amount of equity you have, how can that be considered leverage? It should more appropriately called cash out refinancing instead of a mortgage!!. Maybe we're on different wavelengths!
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
10y
Chris, I think the real question is are you purchasing 1-4 unit buildings or 5+ unit buildings? Net worth is used in 5+ unit buildings as Andrew and Eric have stated. In 1-4 unit deals, net worth is not a requirement, especially if you are financing in your personal name.
Also, you keep stating you will be using 100% financing, which is not accurate. If you have $120k to put down on a property that's great, but you need to have reserves for that property and reserves for you personally. Many people also have a 401k, mututal, etc. You also probably own a vehicle and possibly your own house. These are all used in Net worth calculations. If you have none of that and only have $120k in cash, I would suggest buying a home using no more than $50k.
My suggestion is if you are buying a 1-4 unit building, go seek out some local lenders in your area and get prequalified. Get the money first, then find the deal.
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
10y
Banks will use your rental properties as income if you can show profit for 2 tax years (this is for Fannie/Freddie loans). Local banks financing through your business like to see 1 year, but they may go with a projected cash flow statement depending on circumstances.
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Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Todd Dexheimer thanks for the answers, on the net worth issue I was referring to 5+ commercial properties.
1 Reply
Eric Schleif
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
Chris Pochari I'm not sure where your example is coming from but want to make sure I fully understand the scenario... You're saying you have $1mm cash and want to purchase a $3mm cash flowing multi family building but you don't have a net worth close to $3 million. But that you do have previous experience, good credit, no bankruptcy etc. So I figure depending on the market you can get 75% to 80% of the purchase. That would leave you with somewhere between $250k and $400k in cash after your down payment. If what I wrote above is correct then you could get the deal done in certain markets like the NYC metro. I'm not sure about secondary and tertiary markets. I'd have to see the deal.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
The @Andrew Cushman has to show up in blue font for him to be notified of your question. I will take a stab at it.
Borrower has $500 in net worth (of that $120 is cash)
Purchase price = $600
Down payment at 20% = $120
Loan at 80% leverage = $480
The loan at $480 is less than the borrower's net worth of $500; so, no issue there. The property is leveraged at 80%. The borrower is not giving the lender all of it's net worth, just the down payment and personally guaranteeing the loan, which provides recourse so the lender can attempt to go after those assets if the borrower defaults and the financed property value is not sufficient to cover the loan balance.
I ignored the cash reserves requirement for simplicity.
Good question...hope this helps.
0 Reply
Chris Pochari
OP
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
10y
@Eric Schleif Thanks, I guess the question is solved! The reason I asked this is because I looked at the fannie mae mulitfamily website and it says it requires the borrow to have a net worth equal to or greater than the loan value. That's the only reason I asked. So having a net worth equal to the downpayment would be enough to qualify?
0 Reply
Andrew Cushman
Apartment Syndication · Southern California · Member since 2015 · 71 posts · 194 votes
10y
@Chris Pochari It does not equal 100% downpayment because you keep all of your net worth other than whatever actual cash you put in the property. If you have a $300k 401(k), you can use that same $300k to qualify for commercial loans over and over again. You have to HAVE the balance of the loan, not INVEST it.
Andrew
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Chad Olsen
Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
10y
So I just at Wells Fargo and ran into the commercial loan guy and chatted for a bit. He said that as long as the debt coverage ratio is at least 1.25 on the property the majority of the underwriting criteria goes to low priority. Now I don't really believe him, because nothing is that simple with a bank. BUT, if I have all my ducks in a row AND the DCR is higher than the minimum, it should be a no brainier.
I can't stress enough, however, the importance of having a large reserve just sitting in the bank. When you have five or six figures sitting there they know that you have the liquidity to cover something if it should happen.
If the bank is asking for net worth and other personal criteria for a commercial loan you need to consider two things. 1. Something is up with the bank or the deal. Figure out which one is causing problems and fix it. Either find a new bank or a new deal. Don't force it. 2. Take a strong look at your financials and see if you are a good credit risk. Be brutally honest with yourself. Would you lend money to yourself? This may be a bigger issue than the bank or the deal so make sure you have your house in order.
Good luck!
1 Reply
Andrey Y.
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Chris Pochari:

@Todd Dexheimer If i was making 500k a year I probably wouldn't be asking these types of questions :)
Plenty of doctors make $500k/year and don't know the first thing about commercial loan qualifications / real estate etc.
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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
10y
I have never heard of this. Is this with a bank?
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Eric Schleif
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
Chad Olsen any commercial bank in the country is going to review the borrower's personal financials. Some banks will certainly place a lower importance on it in underwriting a deal than others but all are required to review them.
1 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
These will vary by lender, loan size, market and borrower but provide some parameters for conventional commercial loans:
Credit score = 700+
Bankruptcies = none
Foreclosures = none
Net worth >= loan
Liquidity = 6-12 months of debt service coverage
Leverage on all real estate < 75%
Debt service coverage = 1.20+
REI experience (or you have a great balance sheet or low LTV)
As Eric mentioned, lenders will adjust requirements based on the borrower factors he outlined above. Calling a couple of commercial mortgage brokers can quickly get you up to speed on requirements in your market. Hope this helps.
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Wendell De Guzman
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
10y
Originally posted by @Chris Pochari:

Hi guys I'm new here but I've been puzzled over this question for a while. If commercial mortgages require that the investor have a net worth equal to or greater than the loan amount than isn't the idea of a 30% downpayment ridiculous? the real downpayment would really be 100%? Say someone had a $120,000 to invest, most real estate gurus would say that you could obtain a 400,000 mortgage right? Well not really because if the bank requires your net worth to be equal to the loan amount than you could only borrow $120,000.
Chris,
For the smaller deals, there's no correlation. However, when I assume a $5M loan for a 133-unit apartment building, one of the requirements of the lender was that the net worth of the borrower has to be equal to or greater than the loan amount.
Having said that, each lender is different so get a good commercial mortgage broker to find the best lender for you.
Also, the downpayment that you have is not equal to your net worth. If it is, that means you're putting everything that you own as the downpayment and if I am the bank I will be worried too. If you default, I have no way to recover my loan from your other assets.
Net worth = value of your Assets less Liabilities
Cash is just one asset
You can have equity in other properties you own
Equity in the stock market
Equity in the home you live in now
Equity in businesses
etc.
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