Applying for a Commercial Real Estate Loan? Read This First

Applying for a Commercial Real Estate Loan Read This FirstApplying for a commercial loan is a completely different ballgame than applying for residential mortgages. Commercial lenders have a different set of priorities, and at the end of the day, it may be significantly harder to obtain a commercial real estate loan than a residential loan. Don’t let this discourage you. Working with the right local broker to find the best property and preparing ahead of time will increase your opportunities to obtain the necessary loan.

Research Before You Sign

The language of commercial lending can be complicated which can lead to confusion for borrowers. So, you’ll have to put in a little bit of time doing research. Familiarize yourself with some universal commercial loan concepts so you can communicate the details of the terms of your contract intelligently and avoid any potential misunderstandings.

You don’t need to become an expert in the field overnight. However, even a little bit of knowledge will go a long way to ensuring you obtain the right loan and pursue the right property for your business goals. This will give lenders additional confidence to extend a commercial real estate loan.

What are the Types of Commercial Property Loans?

Whether you are planning on remodeling or expanding your growing business by purchasing a commercial property, you will likely need a loan. There are many types of commercial real estate loans with different qualifications and specifications. Review the list below to familiarize yourself with the primary types of loans:

  • Commercial Bridge Loan
  • Traditional Commercial Mortgage Loan
  • SBA (small business administration) Loans
  • Conduit Loans
  • Soft and Hard Money Loans

Know How Much You Need

One of the first steps to take before applying for a commercial property loan is to figure out how much you need to borrow. Consider the down payment. The maximum loan amount is generally between 65% to 85% with traditional mortgage loans. The lender determines this amount. A down payment on a commercial property is typically between 15% to 35%, depending on the loan type. The loan type will be determined by how much you need to borrow.

If you want to apply for a small business loan, there are some factors to consider. Small business administration loans (SBA loans) are a type of loan issued by banks, credit unions, online lenders, or other financial institutions that are partially guaranteed by the government. Different types of SBA loans have varying loan sizes. For example, SBA microloans give up to $50,000 for inventory and supplies, while SBA 504 loans give up to $5.5 million for land and facilities. Research the loan terms of various types of loans to find the right one for you.

Qualifying for a Commercial Real Estate Loan

Lenders will assess the property’s location, size, condition, and potential income-generating ability to assess its overall value and viability as collateral for the loan. They will also consider your business plan for the property, including past experience managing similar properties and your ability to generate sufficient cash flow to cover loan payments. Here are a few details about loan qualification:

Credit Score

Lenders will review personal and business credit scores to assess lending risk for various types of financing. While certain loans, such as CMBS loans, may not heavily weigh credit scores, they are still typically required for most financing options.

Loan-to-Value Ratio

In commercial property acquisitions or refinances, lenders often use loan-to-value or loan-to-cost ratios to limit financing options. For instance, if a property is valued at $1 million and the lender offers a 75% LTV, the maximum loan amount would be $750,000.

Debt Service Coverage Ratio

Lenders not only evaluate a property’s value but also its debt service coverage ratio (DSCR). The DSCR compares a property’s cash flows to its debt service obligations. By calculating the DSCR, lenders can assess if a property generates sufficient income to cover its debts. DSCR requirements vary by asset type, with higher ratios preferred. It is uncommon for lenders to offer competitive loans with a DSCR below 1.25x.

Minimum Loan Amount

Financing programs often have minimum loan amounts, with some lenders requiring loans of at least $1 million. You can find exceptions in certain sectors, such as multifamily properties.

Collateral

Residential loans may require personal guarantees and use personal assets as collateral. However, commercial loans can offer non-recourse options. In a non-recourse loan, only the building itself is used as collateral. If you default on the loan, the lender can only take possession of the property and not go after your personal assets or income. This can protect borrowers, especially those new to investing in commercial real estate who want to limit their exposure.

When first-time investors buy smaller properties, they often use recourse loans, which can offer competitive terms. These loans allow lenders to go after the borrower’s personal assets if needed, in addition to taking back the property. This extra security for lenders usually means better interest rates and terms for borrowers. While having personal assets on the line may be intimidating, recourse loans can help secure more favorable financing options for growing a commercial real estate portfolio effectively.

Use our Mortgage Calculator to Determine Loan Details

Come Prepared

Once it’s time to apply for the loan formally, make sure you have all of the necessary documentation. This may seem like a slow process. However, some loans, such as hard money loans, require less detailed documentation. At the most, you will need to show a real estate lender:

  • Personal financial records, reports, and books
  • Income statements
  • Business tax returns
  • Insurance information
  • The previous three months of bank statements
  • Third-party property appraisal
  • Credit history

There is often very little leeway on this, so make sure you know ahead of time whether you have all the required documentation. Sometimes, small or new business owners won’t have the level of income documentation required by some lenders, so it’s best that you determine a lender’s requirements before you spend time applying.

At Ullian Realty, we leverage over 45 years of combined market experience in the Brevard County Melbourne/Palm Bay/Titusville commercial industrial real estate market to help you find the right property and assist you with your lender for the right loan for your commercial real estate venture. Please contact us today to find out more about real estate and how commercial loans might assist you in your real estate purchase.

 

FAQs

Can anyone get a commercial mortgage?

Commercial mortgages are available to a wide range of individuals, as various types of lenders offer different qualification requirements. Traditional banks and hard money lenders are among the options available, allowing individuals to find a commercial loan program suitable for their situation.

What is the most common commercial mortgage?

There are various types of commercial mortgages available for different situations. Pursue the loan that best aligns with your business goals. Options of bank loans are available for purchasing or refinancing an existing property, new construction and renovation loans, bank statement loans, DSCR loans, foreign national loans, and loans for special-purpose properties.

Can you get a residential loan on a commercial property?

Residential mortgage loans are specifically for residential properties like single-family homes, townhomes, condominiums, and 2-4-unit buildings. If you want to buy or refinance a commercial property like multi-family buildings, office spaces, retail spaces, industrial properties, or special-purpose buildings, you will need a commercial mortgage loan.