F.A.Q.'s

Q. Is interest rate the most critical aspect of a loan?
A. Depending on the circumstances, other factors are often more important: how quickly the loan can close, the monthly payment, length of term, amortization schedule, prepayment penalty, reporting requirements, covenants, or assumability of the loan.

Q. Are interest rates the same for commercial and residential loans?
A. Commercial loan interest rates tend to be higher for a number of reasons. First, commercial loans have greater inherent risk. Second, government sponsored agencies such as Fannie Mae and Freddie Mac, which help to keep residential rates low by buying loans, don’t exist for the majority of commercial real estate. Lastly, there are fewer lending options for commercial borrowers, which results in a less competitive marketplace.

Q. Can a self-employed borrower get a commercial loan?
A. If the borrower can provide documents to support his income and assets, then he can qualify for a commercial loan program. If he cannot or chooses not to supply tax returns or other documentation, he may qualify for a No Income Verification/Limited Documentation Loan Program (some lenders call these types of loans Stated Income/Stated Asset Loans). This program makes getting a loan easier and faster, especially if he owns a predominately cash-based business.

Q. What is the loan process?
A. The loan process typically consists of four steps. 
     STEP 1: Pre-Approval
     This preliminary screening is to evaluate whether your loan request fits within our most basic lending                          parameters based on property type, loan amount, credit score, and purpose of the loan. Begin STEP 1 by                clicking on the “Apply Now” button at the top of this page or by calling 800.ASK.ZEUS now.  

     STEP 2: Submission
     During STEP 2 Zeus Commercial establishes the appropriate loan terms based on the submitted loan                          application and documentation.  Once the loan application and the documentation have been reviewed then           Zeus Commercial will issue a Letter of Interest (LOI) which is the official loan offering. For a complete list of the      required loan documents see our “Commercial Loan Checklist” under the Resources tab or by clicking here. 

     STEP 3: Underwriting
     Underwriting further evaluates the loan and verifies the application and documentation submitted.                          Underwriting will order the property appraisal, title insurance, and address environmental and other due                diligence matters.

     STEP 4: Closing
     Once all the outstanding conditions are satisfied and the appraisal has been reviewed then Zeus                               Commercial will send out closing documents. After the closing documents are signed then the loan will fund. 

Q. What is the minimum down payment on a commercial loan? 
A. Most commercial lenders will only provide financing up to 80% of the purchase price. However, this figure varies based upon the type of property. The maximum percentage is typically reserved for multi-family properties, while properties considered “more risky” such as restaurants and gas stations may only be eligible for 70-75% maximum financing. However, in both cases, a seller is typically permitted to offer privately-held financing (i.e., seller financing) of up to 5-15% above what the financial institution will offer. Zeus Commercial has loans with as little as 3% down (97% LTV).  The property type and the borrower’s profile will determine eligibility for this program.  Most importantly, over 91% of our funded loans are with 10% down or less.    

Q. How do I calculate the Net Operating Income of a property?
A. Net operating income is determined by subtracting vacancy amount and operating expenses from a property's gross income. Operating expenses include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating expenses do not include the following items: improvements such as a new roof, personal property such as a lawn mower, mortgage payments (debt service), income and capital gains taxes, loan origination fees, etc. Appraisers use the Income Approach, Cost Replacement and Market Comparison methods to estimate the value of property.  The Income Approach utilizes the theory of Capitalization. Keep in mind, that the NOI does not take into account your mortgage payment (debt service) on the property. That number is used in another calculation process known as Debt Service Coverage Ratio.

The more technical formula is: Potential Gross Income + Other Income - Vacancy - Real Estate Taxes - Operating Expenses = Net Operating Income

Example:

Net Operating Income (NOI) is calculated as follows.

(*) Operating Expenses does not include mortgage payments or debt service. 

Q. What is a “Cap Rate”?
A. The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of  income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. 

It provides a more reliable estimate of value than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a property's financial detail. The GRM calculation only considers a property's selling price and gross rents. The Cap Rate calculation incorporates a property's selling price, gross rents, non rental income, vacancy amount and operating expenses thus providing a more reliable estimate of value.

If we have a seller and an interested buyer for particular piece of  income property, the seller is trying to get the highest price for the property or sell at the lowest cap rate possible. The buyer is trying to purchase the property at the lowest price possible which translates into a higher cap rate. The lower the selling price the higher the cap rate. The higher the selling price, the lower the cap rate. In summary, from an investor's or buyer's perspective, the higher the cap rate, the better.

Investors expect a larger return when investing in high risk income properties. The Cap rate may vary in different areas of a city for many reasons such as desirability of location, level of crime and general condition of an area. You would expect lower capitalization rates in newer or more desirable areas of a city and higher cap rates in less desirable areas to compensate for the added risk.  In a real estate market where net operating incomes are increasing and cap rates are declining over time for a given type of investment property such as office buildings, values will be generally increasing. If net operating incomes are decreasing and capitalization rates are increasing over time in a given market place, property values will be declining.

If you would like to find out what the cap rate is for a particular type of property in a given market place, check with an appraiser or lender in that area. Be aware that the frequency of sales for commercial income properties in a given market place may be low and reliable capitalization rate data may not be available. If you are able to obtain a market cap rate from an appraiser or lender for the type of property you are evaluating, check to see if the cap rate value was determined with recent sales of comparable properties or if it was constructed. When adequate financial data is unavailable, appraisers may construct a cap rate through analysis of its component parts thus reducing the credibility of the results. Cap rates which are determined by evaluating the recent actions of buyers and sellers in a particular market place will produce the best market value estimate for a property.

If you are able to obtain a market cap rate, you can then use this information to estimate what similar income properties should sell for. This will help you to gauge whether or not the asking price for a particular piece of property is over or under priced.

Example 1:   A property has a NOI of $155,000 and the asking price is $1,200,000.

                                                              $155,000
                      Cap Rate  =                       --------------         X      100     =    12.9 rounded
                                                              $1,200,000

Example 2:  A property has a NOI of $120,000 and Cap Rates in the area for this type of property average about 12%.
             
                                                                             $120,000
                     Estimated Market Value  =     --------------       =        .12
                                                                    $1,000,000

Q. What does Debt Service Coverage Ratio (DSCR)(DSR)(DCR)(DR) mean and how do I calculate it?
A. Also known as Debt Service Coverage Ratio (DSCR). The debt coverage ratio (DSCR) is a widely used benchmark which measures an income producing property's ability to cover the monthly mortgage payments. The DSCR is calculated by dividing the net operating income (NOI) by a property's annual
debt service. Annual debt service equals the annual total of all interest and principal paid for all loans on a property. A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses. For example, a DSCR of .9 indicates a negative income. There is only enough income available after paying operating expenses to pay 90% of the annual mortgage payments or debt service. A property with a DSCR of 1.25 generates 1.25 times as much annual  income as the annual debt service on the property. In this example, the property creates 25% more income (NOI) than is required to cover the annual debt service.

Example: 

We are considering buying an investment property with a net operating income of $24,000 and annual debt service of $20,000. The DSCR for this property would be equal to 1.2.  This means that it generates 20% more annual net operating income than is required to cover the annual mortgage payment amount.

                                                        Net Operating Income = $24,000
                Debt Coverage Ratio  =  -----------------------------------------------   =  1.2 
                                                        Annual Debt Service = $20,000

DSCR requirements may vary based on the loan program, property type, and the borrower’s profile from as low as 1.0 to as high as 1.5. From an underwriter’s perspective, the higher the debt service coverage ratio value, the more income there is available to cover the debt service and thus less risk.

                                                                            
Q. What does “Stress Test” mean?
A. If a loan starts at a low adjustable rate, the borrower may need to qualify at a worst-case-scenario rate. For example, if the rate were to start at a Prime + 2%, the borrower would probably have no problem qualifying for the loan if Prime is at 5.25% since the rate would then be 7.25%. However, since the loan may adjust over time, the borrower may need to demonstrate an ability to pay should the prime rate increase because obviously the rate will also increase at that time. So, the program may require that the borrower qualifying with a “stress test” or “qualifying rate” of 10.25% in order to ensure that even if Prime were to increase dramatically, the borrower would still be able to make the mortgage payments.

Q. What does “Non-Recourse” mean?
A. In simple terms, a non-recourse loan is one in which, if the loan is defaulted on, the lender can only go after the property used as collateral, as opposed to a recourse loan in which the lender can go after the company or business entity for repayment of that loan, or a full or personal recourse loan in which the lender can go after the owners of the business entity and guarantors. Loans on properties other than multi-family properties typically require full recourse, meaning the guarantors and owners of the business will have to ensure timely payment of the loan.  Non-recourse loans typically have greater down payment requirements. 

Q. Do you offer commercial loans in my state?
A. Yes, Zeus Commercial lends worldwide.

Q. Does a borrower have to live in the same state as the property to get a commercial loan?
A. Many lenders, especially banks, will not lend money if the borrower and the property are located in different states or if the borrower or the property are located outside of the bank’s regional footprint.  However, Zeus Commercial will lend to out-of-state and out-of-country borrowers.

Q. How long must a borrower own a property before they can apply for a refinance with cash-out?
A. We do not have a strict seasoning requirement and are willing to work with you to find a solution that suits your needs.  We have some very creative loan programs to help borrowers take cash-out of their investments with very little to no time delays. 

Q. How long will it take to close my loan?
A. Loans usually close within 28 - 45 days; however, we will do everything possible to ensure your loan closes within your time frame.

Q. Why is it valuable to apply for a higher loan-to-value (LTV) amount?
A. Applying for a loan with a higher LTV amount allows the borrower to better leverage their money. The return on equity they receive from their investment will be higher when they put less money down. Less money out-of-pocket means more cash on hand to invest in the actual business.

Q. Are the appraisal costs the same for commercial and residential properties?
A. Determining valuation for commercial properties is more intricate, and therefore more costly than for residential properties. A lot more research is involved to find similar commercial properties in a given market. Recent sales are compared, as well as the rental income potential. Proper valuation is critical as property income and appreciation potential are the biggest determinants of value for any real estate investor.

Q. Will you accept an existing appraisal?
A. Possibly. If the appraisal was completed within the last six months, we encourage you to send it in for review. We try to keep borrower costs to a minimum and will typically accept a current appraisal of good quality.

Q. How does the appraisal process work?
A. After we receive a signed Letter of Interest from the borrower then we order the appraisal. Because of the volume of appraisal assignments ordered by us and our affiliates, we are able to command favorable pricing and turnaround times. The appraisal generally takes 2 to 4 weeks to complete. The loan should close within a week thereafter.  We do allow our borrowers to expedite the appraisal process by paying a rush fee.  This fee may vary and it typically reduces the timeframe down to 5 days.  Additionally, Zeus Commercial has several loan programs that do not require an appraisal be ordered. 

Q. Who is responsible for organizing the closing?
A. We handle all the details for your closing. If there is a title company you prefer to work with, we can schedule your closing with them; however, we do prefer to use title companies with which we currently have working relationships.

Q. Who orders the title policy?
A. We order the title because it enables us to manage the deal and keep the process moving. We have relationships with title companies who understand the endorsements we require and are responsive to our needs.

Q. What if the title is already in process?
A. We will work with you to help ensure there are no problems.

Q. What kind of credit does a borrower need in order to qualify for a commercial loan?
A. If you were to deal directly with a bank or other type of financial institution, that institution may have a set requirement for a particular credit score or credit profile that you may be required to have. However, with Zeus Commercial, the credit score is not one of the first considerations in qualifying you for a commercial loan. The first consideration is the property type. The second is the income of the property. The third is your financial net worth and personal cash flow. And finally, the credit score. The credit score isn’t as important as the credit history. Having tax liens, derogatory public records, and recent late payments report on the credit report is a huge detriment in your approval process.

Q. How can a borrower obtain their credit reports and credit scores?
A. They are entitled to a free credit report from each of the three credit bureaus once a year. They can obtain a report at www.AnnualCreditReport.com. They can also purchase your credit score from Equifax at their website or at www.myfico.com.

Q. What factors affect a borrower’s credit score the most?
A. In order of importance:
     35% Your payment history
     30% The amount you owe on open accounts
     15% Length of your credit history
     10% New credit you’ve been granted
     10% Types of credit you use

Q. What other factors, other than credit scores, will you be considering when approving a commercial loan?
A. Zeus Commercial acknowledges that credit scoring is not a perfect science. Therefore, we consider other risk factors which may include:
     Liquidity – The dollar amount of the borrowers assets that are easily convertible to cash.
     Credit Profile – The timely payment of mortgages, installment loans, and revolving accounts may offset           a negative credit score. 
     Business experience – The length of time the borrower has been in business and a real estate investor.
     Property Condition and Type – Certain property types have inherently lower risk levels and properties           that have no deferred maintenance may help compensate for other negative factors.  
     Property Location – Properties in more populous areas typically have higher resale values. 
     Verifiable personal income – The amount of annual income the borrower can verify.
     Property cash flow – The amount of cash flow that a property makes can help offset other weak f                    actors for a borrower.
     Loan-to-Value (LTV) – The ratio of the loan amount compared to the sales price can have a large                     impact. This equates to a larger or smaller down payment and this is weighed heavily by our                          underwriters.

Q. What is a Cash-out Refinance and why should I request this?
A. A loan that allows you to refinance for a higher dollar amount than your current loan balance, and take the difference in cash. Not all lenders offer cash-out refinance loans, and those that do often have restrictions as to the amount of cash-out and the use of the funds. Why? To turn your equity in a property into cash so that you can put it to work making you more money.  Equity in your property is considered “dead equity” because you are not making a return on it unless you pull it out and put it to work somewhere else.

Q. What is a Commercial Hard Money Lender and when should I use one?
A. Hard money lenders are the lenders of last resort. Because these lenders accommodate riskier loan requests, they have higher interest rates, higher fees, and lower loan amounts relative to property value. You should consider hard money lenders when you have exhausted the more traditional options.