How to be Successful at Obtaining a Commercial Mortgage for Your Business
To help you successfully get a commercial mortgage for your business, it helps to understand the various components that impact your ability to obtain a commercial mortgage. Commercial mortgage loans differ from home mortgages in some important ways. Understanding the differences between these types of loans can help you achieve greater success in your commercial mortgage application. Here are some of the most important factors that can affect your ability to obtain a commercial mortgage in today’s demanding financial marketplace.
Factors that Affect Your Ability to Obtain a Commercial Mortgage
Security for the Loan
Just as with residential mortgages, commercial mortgages require collateral. This collateral usually consists of the property to be purchased. In some cases, however, lenders may require added security to ensure that you repay the loan. If the company applying for the mortgage has a limited credit history or if the value of the property to be mortgaged is uncertain, the shareholders or owners may require additional guarantees.This may allow the lender to pursue the individual guarantors if the commercial mortgage goes unpaid within the time agreed.
The Size of the Loan
The type of lender to approach for a commercial mortgage will vary depending on the amount needed to acquire the property. You can usually obtain smaller loans through local lenders or companies that specialize in direct loans to small businesses like we do at Reprop Financial. Regional banks or Wall Street lending institutions usually handle larger loans. Lenders are more likely to act favorably on applications that demonstrate financial responsibility and stability and on applicants with much collateral to back their loans.
Balloon loans feature a large lump-sum payment that is due at a particular time after the origination of the loan. The payment is usually due after 3, 5 or 10 years. If the borrower lacks the funds for the balloon payment, the loan must be reissued or refinanced at that time. In some cases, the company may no longer qualify for the loan and the property may be placed into foreclosure if another source of financing is unable to be obtained. Fixed-rate loans offer more flexibility and are preferable if you can qualify for these financial arrangements.
Unlike residential loans, commercial mortgages typically require a much higher down payment. Unimproved land usually entails the largest initial investment from borrowers; a down payment of 35 percent may be necessary for these real estate holdings. Finished and occupied properties, by contrast, may only require a 20 percent down payment on the part of the commercial borrower. The size of your down payment can make a significant difference in your ability to qualify for a commercial mortgage loan.
Debt and Assets
Lenders also consider the debt-service coverage ratio when determining whether to approve a commercial mortgage loan. To determine this figure, you must divide a company’s annual net operating income by the amount it pays in mortgage principal and interest each year. If this number is less than 1, the company is operating with negative cash flow and is unlikely to be approved for a commercial mortgage loan.
Before applying for a commercial mortgage, you should ensure that your financial affairs are in good order and that you do not have any outstanding credit issues. If guarantors are likely to be required for the loan, taking steps to clean up any credit problems can increase the chances of approval for these necessary financial arrangements. Finally, shopping around for the best deals can save you money over the course of your commercial mortgage loan.
If you are interested in obtaining a commercial loan for your business, contact the financial experts at ReProp Financial by calling 1-800-444-2948 or submit a loan request online today. At ReProp Financial, we tailor our commercial loans to meet your needs!