Guide to Commercial Mortgage Loans
If you’ve been running your business for a while and you’re interested in purchasing or updating a commercial real estate property, you might be in the market for a commercial mortgage loan.
Commercial mortgage loans are similar to traditional mortgage loans; but instead of borrowing money to buy residential property, you secure any land or property for commercial purposes. Examples of commercial property are office buildings, industrial warehouses, apartment complexes, shopping centers, commercial building or land zones for commercial use.
You can also use commercial mortgage loans to develop existing or new commercial property. If you have existing commercial property, you can also use the funds from the loan to extend your current premises.
In this guide, we will walk you through the various types of commercial mortgage loans, application process, rates and terms, and alternatives.
Who needs a commercial mortgage loan? Do I need one?
While some businesses are successful at operating from home, the majority of businesses need a storefront or an office to welcome customers; and depending on your industry, you may need a warehouse to store all your inventory. Beyond having property to operate from or store your merchandise in, owning your own commercial property future-proofs your business by giving it access to equity as real estate prices appreciate over time.
Commercial Mortgage Loan Lenders
Asset-backed Trusts (CMBS) – hard money lender
GSE-backed mortgage pools
Life Insurance Companies
Common Requirements to Apply for a Commercial Mortgage Loan
Because not all commercial mortgage loans are the same, the requirements and criteria are different. Minimum credit score, years in business, loanable amount and terms will vary from lender to lender.
Here are some of the financial documentation required for you to proceed with your application:
Up-to-date tax returns (both business and personal)
Bank statements – savings and checking (both business and personal)
Asset and liability statements
Financial history and profiles of all business partners and directors
The Commercial Mortgage Loan Application Process
Just like a traditional home loan, lenders determine pre-qualifying potential even before you fill out an application form. The pre-qualification process involves evaluating your financial history, income, and debts. Once you have passed pre-qualification, you move on to the next phase of the application process.
Traditional lenders will typically require financial statements, income tax returns, and banking statements from the last 3-5 years to determine business stability. Apart from the significant amount of financial paperwork involved, be prepared to show the lender your business plan that includes projected earnings. Your credit history will be evaluated along with your income and available collateral. At some point in the process, expect to pay for an appraisal of the property.
Once all the paperwork has been approved, your loan application is forwarded to a loan underwriter who will either approve or deny your application based on the information you provide.
Because commercial mortgage loans deal with enormous sums of money, banks and lenders can take 3 to 4 months to process a loan. This is because of all the documentation that needs to be evaluated and verified. Property appraisal also needs to take place.
Most Common Interest and Repayment Terms for Commercial Mortgage Loans
Traditional Commercial Loan Mortgage loans are up to 85% of loan-to-value (LTV). They’re ideal for established businesses who have been in business at least 2 years and have excellent credit. The loan term is between 7 and 30 years. Conventional commercial mortgage loans given by traditional banks offer fixed and variable rates which are typically between 5% and 7%. To qualify for terms of 5 to 10 years, you would need a credit score of 660 or higher and a down payment of no less than 20%.
However, in cases where loan approval is based on value property rather than borrower’s creditworthiness, the rates may be higher. These are less conventional commercial mortgage loans such as hard money loans which range from 10% and `8 and offer a 6-month to 24-month term. There are also soft money lenders who charge rates higher than banks – between 8% and 12% with financing for 6 months to 5 years. While commercial mortgage terms range between 5 and 25 years, the rates are rarely fixed for more than 5 years. The rate is likely to reset every 5 years; otherwise, the loan balloons.
Alternatives to Commercial Mortgage Loans
The process involved in acquiring a commercial mortgage loan is rigorous. Remember, this type of loan can take months to close; therefore, if your financing needs are immediate, commercial mortgage loans may not be your best option.
Many business owners also don’t realize that lenders often impose hidden costs when applying for commercial mortgage loans that can add up to thousands of dollars in loan application fees and legal fees. There are also survey and appraisal charges. Often, these charges must be paid before the rejection or approval decision is made. Therefore, it would be wise only to apply if you know you have a high chance of approval.
Fortunately, there are bank and non-bank alternatives to commercial mortgage loans for the business owner who prefers to explore rental property or alternative financing options for purchasing real estate.
Commercial property mortgage loans are typically long-term loans that can last up to 30 years. However, there are other types of commercial property loans that beyond the conventional commercial mortgage loan that offers shorter terms and will depend on your unique business needs.
Commercial Bridge Loan – Loan amounts are up 90% of purchase price. They are ideal for businesses looking for short-term owner-occupied financing as the loan terms are anywhere between 6 months and 36 months.
Commercial Hard Money Loan – Commercial hard money loans have loan terms of between 12 months and 3 years. They’re ideal for businesses looking for renovation financing.
CDC/SBA 504 Loan – Similar to commercial bridge loans, CDC/ SBA 504 loans allow loan amounts up to 90% of purchase price. They’re for established businesses who have been in business at least 3 years who are looking for long-term owner-occupied commercial loans that have no maximum limit. Loan terms are between 10 and 20 years.
SBA 7(a) Loan – SBA 7(a) loans are also for established businesses as the loan amounts can go up to $5 million with a loan term of up to 25 years.
Additional business loans resources: