How a Texas Commercial Real Estate Loan Differs from a Residential Loan

3page_img4-bigObtaining a Texas commercial real estate loan is a very different process than applying for a residential loan. Consider these tips when searching for funding for your next project.

Texas commercial real estate loans are capital that is obtained for business purposes, whether renovating an existing home to sell or rent, building an apartment or developing office space. These types of loans are typically secured by collateral or liens on the commercial property. How institutions and lenders determine if one is qualified is a much different process than a traditional home mortgage that requires bank statements, recent pay stubs, prior tax returns and your credit report.

When obtaining a loan for commercial use, the lender is first and foremost interested in the property or the project. If it’s an existing property, they will want to see photos of the inside and outside, operating history, cash flow and current schedule of rents. The net operating income (NOI) must be at least 25 to 45 percent over the commercial mortgage payment. Another way that lenders state this is that the debt service coverage ratio must exceed 1.25 to 1.45. The requirements are very different depending on the type of lender of which there are many including traditional banks and credit unions, insurance companies, Small Business Administration, pension funds, government agencies, CMBS lenders and private hard money lenders.

While individuals generally obtain home mortgages—corporations, partnerships and trusts are often formed in order to obtain Texas commercial real estate loans and develop projects. There are both non-recourse and recourse loans. A non-recourse loan means that the only “recourse” the lender has should the borrower default is to take the property. A recourse loan means that the borrower is personally responsible and the lender has the right to try and collect any balance owed even after taking the property back. Another consideration that is often different between these two types of loans is the prepayment penalty which often accompanies a commercial mortgage.

Loan-to-Value and Debt-to-Income Ratios

Recently, Fannie Mae and Freddie Mac increased their debt-to-income ratio limit from 45 to 50 percent of pretax income, making it easier to qualify for these types of loans. While standard requirements for a home mortgage, they also come into play for commercial mortgages if the borrower is considered a secondary source of payment such as in a recourse loan. The loan-to-value is another important underwriting ratio that differs from home and commercial loans. It represents the value of the loan against the value of the property, determining how much equity the borrower requires. It is the amount of the loan divided by the purchase price. Commercial loans generally require an LTV of 65 to 80 percent while home loans will sometimes allow up to 100 percent LTV.

Consider a private hard money lender for your next Texas commercial real estate loan.

At Level 4 Funding, we work with hundreds of investors that offer private hard money loans. These types of loans are based predominantly on collateral and offer quick funding as well as interest-only payments and no prepayment penalties. Call us for a no-obligation quote today.


Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177 NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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