Commercial mortgage financing is an option for people who want to buy income-earning property. These properties include retail shops, office buildings, hotels and multifamily units.
Unlike residential mortgages, lenders don’t use your personal income to determine your ability to service the loan. Instead, they use the cash flow from the commercial property itself.
Getting a Commercial Mortgage
Getting a commercial mortgage is similar to a residential mortgage in that you have to submit a variety of financial documents. However, the loan amount is usually much higher and the loan terms may be longer than those for a residential mortgage. This type of financing is ideal for business owners looking to expand or upgrade their current property.
Depending on the lender, the mortgage may require a deposit. This deposit is typically more than 20% of the total mortgage. If you’re unable to meet the minimum deposit requirements, you can explore alternative sources of funding, such as business loans and personal mortgages. Bridging loans can also be a useful solution if you’re looking to buy a property before the sale of another property completes.
While there are many lenders that offer commercial mortgages, you’ll want to make sure you choose a reputable one. A good commercial mortgage broker will be able to match you with the right lender for your needs. They’ll also help you prepare your documents and make the process as smooth as possible.
In order to qualify for a commercial mortgage, you’ll need to prove that your company is profitable and can afford the monthly payments. If you’re unsure whether you’ll be able to afford the repayments, you can use an online commercial mortgage calculator to find out.
Lenders’ Requirements
A commercial mortgage can be used to finance the purchase, construction or redevelopment of an office building, multi-unit rental property, warehouses, hotel and other non-owner-occupied business properties. It may be recourse or non-recourse depending on the terms agreed to between the borrower and lender. A recourse mortgage is backed by the borrower’s personal guarantee and may be a better choice for smaller businesses that don’t have substantial assets or financial resources.
Lenders are typically more risk-averse with commercial mortgages than residential loans, so they require higher credit scores and down payments. There are also fewer programs for securitizing commercial mortgages, so lenders must hold many of these loans rather than selling them off to investors.
The loan application process for a commercial mortgage is usually longer and more involved than that for a home loan, so it’s important to start early and be prepared with the required documentation. That includes three years of tax returns, a current balance sheet, and historical income and expenses for the property. It’s helpful to have a professional who can help you prepare these documents.
The lender is likely to look at the company’s debt service coverage ratio (DSCR), which is its annual net operating income divided by its annual total debt-service expense. This ratio is a good indicator of the amount of cash flow the business can generate to repay its mortgage. A lender will usually want to see a DSCR of 1.25 or higher.
Lenders’ Fees
Lenders’ fees are a subset of closing costs and vary by lender. They often include an origination fee, processing or underwriting fees, and a wire transfer fee. These fees are designed to cover the lender’s costs associated with reviewing and preparing your loan for final approval.
Some lenders may also charge a commitment fee. This fee is set aside in advance of when the loan will be given to you, and it’s a hedge against conditions in the market changing. Whether or not this fee is charged depends on your lender and the type of commercial property you are buying.
Another important factor in qualifying for a commercial mortgage is your personal credit and income. You will need to have a solid score and be up to date on all your debt payments. Getting preapproved for a mortgage before you begin looking for properties will help speed up the process and let you judge how much you can afford to borrow.
Commercial loans are used to buy and finance commercial properties such as office buildings, warehouses, storefronts, retail malls or apartment complexes that are used for business purposes. The loan is repaid over a set amount of time and the interest is based on your cash flow from the property, not from your personal earnings or savings.
Refinancing
A commercial mortgage is a type of financing that allows business owners, investors and developers to purchase property with one single payment. It works similarly to residential mortgages, but with some key differences. The process is usually slower, and the qualifications are more stringent. Lenders conduct background checks and analyze both personal and business credit history to determine a borrower’s ability to repay the loan. The interest rate is typically higher for commercial mortgages.
Refinancing a commercial real estate loan involves replacing the existing mortgage with a new one. This may be done for a variety of reasons, such as to lower the interest rate or to avoid an upcoming balloon payment. A borrower may also choose to change the repayment term or type of loan in order to improve cash flow.
Banks offer both adjustable and fixed rate refinance mortgages for commercial properties. These loans typically require full documents including a few years of business tax returns, personal tax returns, financial statements, balance sheets, rent rolls and appraisals. However, a strong credit score and improved financial position can help to reduce the amount of required documentation.
Another common option is a commercial bridge loan, which is a short-term loan that helps borrowers renovate a property until they can secure a long-term mortgage. These loans often carry a high interest rate and come due in two years or less.