Many borrowers are surprised to learn that life companies are one of the most traditional sources of commercial mortgage financing in the business and have been for decades. Historically they focused on trophy type project ie with minimum loan amounts above $10,000,000 up to a billion or more. Due to the credit crisis many life insurance lenders have lowered their minimum loan amounts to a $1,000,000 and a few to as low as $500,000.

But what are the positives and negative of this type of financing? That's what this article is about.
One of the best features of this type of financing is long term fixed rates. 5, 10, and 15 year fixed rates are available. As of this writing rates are competitive compared to conventional bank loans, ranging from 5% - to 6% (The longer the fixed period the higher the rate) often only 30 basis points higher than bank financing.

Also, because life companies are not banks they do not they do not have the same underwriting standards and typical limitations that banks do. This is not to suggest that they are not conservative, which they are. For example most of them are capped at 65% loan to value and 1.3 to 1.35 debt coverage ratios and only like general use properties such as retail, office or industrial. But still they can and will do things that banks cannot. Such as "cash out refinances", which is currently nonexistent with banks in this market.

Another benefit includes that they do mostly investment properties loans which is still difficult to get done with most banks. The underwriting process is also simplified as life companies normally lend their own money and hold onto and service loans over their life, rather than pooling them and selling them on Wall Street. So for the borrower this means that they don't have to perfectly fit into a restrictive "Box".

There are negatives though with working with Life Companies. And they are considerable. Expensive pre payment penalties, higher loan fees and large upfront deposits top the list.

As far as pre payments penalties are concerned the longer the fixed period the higher the pre pay. And they are structured as a yield maintenance type pre pays. Which can be exceedingly expensive.

The loan fees with life companies are normally 2 or 3 time higher than with banks. Expect a minimum of 2% and most likely 3%. Part of the reason here is that borrowers are not allowed to work directly with the lenders but have to go through a correspondent and both parties normally charge at least 1%.

As far as up front deposits, unlike banks that normally require just 3rd party fees, such as appraisal, to be covered at the execution of a term sheet, life companies require borrowers to pay 1% at execution of the term sheet, plus third party fees and one more 1% after the lender issues a commitment letter. So on a $2,000,000 loan amount the borrower will likely have paid out $55,000 out of pocket to secure the loan.

This is before funding occurs. Life companies often put in writing the deposits are refundable if the loan is declined but many borrowers find it very difficult to write these checks.

Bank financing for investment properties less than $4,000,000 remains the better alternative - lower fees, less money at risk, lower pre pays, and lower rates are the reasons. We continue to close investment property loans as well as owner occupied and invite you to contact us for your purchase or refinance transaction.