commercial property loan

Commercial Property Loan: Qualifying & Applying

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October 27, 2023

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If you want to expand your business by setting up a new facility, such as a store or office space, or expand an existing location, you’ll need the help of commercial lending. Without a commercial property loan, purchasing new real estate or undertaking significant expansion may be financially challenging for your business.

However, this is nothing for business owners to feel ashamed of since commercial real estate is expensive, and nearly all businesses would opt for a mortgage. But while you may already be familiar with the residential mortgage process for buying a home, the commercial property loan process differs in several ways.

Continue reading to learn more about qualifying and applying for commercial real estate financing.

Explore Your Commercial Property Loan Options

Many types of commercial real estate loans exist that can help fund your project, such as:

  • Agency loans
  • Bank term loans
  • Commercial Mortgage Backed Securities loans (CMBS loans)
  • Housing and Urban Development loans (HUD loans)
  • Life company loans
  • Mezzanine loans
  • Portfolio loans
  • Small Business Administration loans (SBA loans)
    • SBA 7(a) loan
    • SBA 504 loan

There are also various loans based on purpose. For example, do you need a loan to buy a multifamily building or refinance an existing loan? Perhaps you need construction financing. On the other hand, you may need a short-term bridge loan to cover costs in the interim period between when one loan ends and another begins.

In addition to the types of loans, you should also be familiar with the loan terms for business financing. Consider the following questions when exploring loan options:

  • How long is the amortization period? (the length of time you have to pay
    back the loan in full plus the principal interest)
  • What will the interest rate be? Will you receive a fixed rate or a variable mortgage rate?
  • Do the repayment terms include prepayment penalties?
  • Does the loan require a balloon payment? (small monthly payments followed by a
    large lump sum payment at the end of the loan period)
  • Is there an origination fee?
  • What is the loan-to-value ratio (LTV ratio) on the loan?

Know What It Takes to Qualify

To secure a commercial property mortgage, you’ll need the following:

A lender will check your creditworthiness by reviewing your business and personal credit scores. The minimum requirement is typically between 660 and 680 for conventional loans, but many business loans have lower requirements. You must also show how long you have been in business, as most lenders will only lend to an established company. This means you should already be in business for one to two years, minimum.

Your business must also prove it has enough cash flow to afford its monthly payments for the given loan amount. Thus, each lender will require at least two years of tax returns in addition to the business’s organization documents and operating agreement.

Finally, you must have 25-30% equity in a property (if refinancing) or put down a down payment of at least 25% for mortgage approval and have property insurance.

Remember that most lenders require the property to be owner-occupied, meaning your business occupies at least 51% of the building. For new construction, lenders often require 60% owner occupancy.

When in doubt, ask questions about commercial loans to ensure you get the right loan for your project and meet the qualifications.

Get Your Finances in Order

Once you know what it takes to qualify for the mortgage loan program you desire, you need to check that your finances meet all the eligibility requirements.

If you don’t meet the requirements, you must improve your finances before applying. Alternatively, you can select another financing option, such as a business line of credit or a business credit card. However, these are not ideal options when getting a loan for a commercial property.

Research Potential Commercial Lenders

Borrowers can get a commercial mortgage from one of several different types of lenders or financial institutions. They include:

  • Banks
  • Commercial lenders
  • Conduit lenders
  • Government agencies
  • Hard-money lenders
  • P2P marketplaces

The loans available from each lender vary, as do the eligibility requirements. For instance, some leaders have less rigid underwriting standards, making them a more attractive option.

Explore the pros and cons of each lender to see who offers the most suitable option. Additionally, choosing an FDIC-insured lender as an added security measure would be best.

Gather Important Application Information and Documentation

Next, gather the required documents to begin the application process. Although the documentation may vary by loan type and lender, it’s best to have the following on hand:

  • Bank statements and financial disclosures, including income and expense statements
  • Letter of explanation for any derogatory credit (if applicable)
  • List of real estate holdings and property leases
  • Operating statements
  • Personal financial statements
  • Personal resume
  • Property management resume or letter of credentials
  • Property rent roll
  • Tax returns

Ask your lender what other documentation or information they require before you start the application.

Start Applying for a Commercial Property Loan

With the documentation in hand, you can begin applying for your loan. If you choose an online lender, you’ll likely be able to complete the application digitally. You may need to apply in person for traditional lenders, but there could also be an online option.

If you have any questions about the application or the documents you must supply during the process, speak with your lender.

Finish the Process and Get Funded

After applying, you can close on the loan. Review the loan agreement carefully to ensure you agree with all the terms.

Always ask for clarification if you don’t understand something or if there is a stipulation in the agreement you were previously unaware would be there. In many cases, you can continue negotiating the loan terms should there be something in the fine print that wasn’t previously discussed.

Once you receive the funds, you can begin the real estate closing process. This includes going into escrow, settling the closing costs, and transferring the title.

Learn More About Commercial Property Loans Today

A commercial property loan could be just what your business needs to grow and expand its operations. After reviewing this guide, you should be more than ready to get the funds you need.

So, when the time is right, apply for commercial property financing from The Associates Home Loan of Florida, or contact us to learn about our other small business loans. Our team will help your business get the funding it requires to succeed.

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