Commercial loans have a stricter set of eligibility requirements than personal loans. For this reason you will want to learn what it really takes to successfully complete the loan application process.
Not only are commercial mortgage loans much larger than a personal home loan but they also represent more of a risk for the lender. Very rarely are commercial mortgages backed by the federal government so lenders want to be certain that they are only providing these large loans to very qualified borrowers. In addition, businesses are more closely tied to the overall economy than personal borrowers so if the economy begins to decline then commercial loans are much more likely to fall into foreclosure. This increased risk keeps lenders very diligent when they are in the process of evaluating a loan application.
In addition to being certain that the business and the owners represent a good risk, the lender wants to be certain that the collateral on the loan, that is the building that you are purchasing, is worth the amount that you are requesting. And in most cases the lender wants you to only be borrowing about 75% to 80% of the value of the building. Because commercial real estate values can fluctuate more than residential property, the lender likes there to be a buffer of equity in the property to ensure that they have enough collateral to cover the full balance of the loan in the event of a foreclosure. So having equity in the property is important when applying for a commercial mortgage.
Cash flow of your business is another important factor that a lender will consider. As a rule they prefer to see a steady net income that is at least 20% greater than your carried debt. To verify this information, the lender will require that you submit detailed financial documents showing income, expenses and budgetary aspects of the business. They will also want to verify any assets or savings that the company has which could be easily converted to cash to cover the mortgage payments.
In addition to the financials for the business, you as the owner will also need to submit documentation demonstrating your creditworthiness. In the event that the business fails or is unable to pay the commercial loan, then you will be the guarantor on the loan as the owner of the business. Your credit score, income, assets and debts can all come into play when your business is seeking a commercial mortgage. In addition, all other owners must be prepared to submit their personal financial documents to secure the loan.
As a business owner you are truly tied financially to the business for many years. It is not until the company has been operating successfully for over five years that it can begin to stand on its own from a financial aspect. Until that time, you will need to have a good credit score of over 700 and a strong financial history to be approved for a commercial mortgage.
Dennis Dahlberg Broker/RI/CEO
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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