Lending Ratios Used in Multifamily & Commercial Real Estate Lending

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Commercial lending is a type of credit that allows you to request large amounts, with extended payment terms and low-interest rates. It is prevalent in the USA. However, space is gaining and has attracted many people’s interest, precisely because loan interest is uninhabitable. This type of loan is widely used to negotiate expensive debts, invest in a commercial property, etc.

How Does it Work?

The loan with property guarantee receives this name precisely because a property is used to guarantee the installments’ payment. By doing this, the client indicates to the financial institution that he does not present default risks and can borrow money at low-interest rates. Therefore, in this credit line, one of the prerequisites is to have a property registered in the person’s name applying for and signing the loan agreement. It can be residential or commercial.

During the loan period, the transaction is registered with a notary, but the property remains in the owner’s name, residing or renting it commercially. There is no need to vacate. Benefits: flexible interest, long terms, achieves high values, and you don’t need to sell the property.

Process Steps

Until the money falls into your account, it takes a few stages and takes a while. The process takes longer than in other modalities. But the wait is worth it, as interest rates are considerably much lower than different types of loans.

Request: nowadays, it is possible to simulate the loan on the institution’s website. According to each company, you can also request over the internet, filling in some data, or by phone.

Credit analysis: in this step, the customer’s financial situation is analyzed to see if he can afford the installments in addition to assessing the amount required. If they do not meet the company’s criteria, the order is barred.

Legal analysis and evaluation of the property: the documents of the requestor undergo verification and sorting. At the same time, the asset is valued so that it becomes a guarantee of payment.

Contract signature: after everything is approved, the document formalizing the loan for signature is released. The property must be registered with the Real Estate Registry Office. The contract must be handed over to the bank. After these stages, the credit is released to your account.

Why are Interest Rates Low?

This credit line is known to have low-interest rates, and that has an explanation. As the financial institution has the asset as a guarantee of payment, the default rate drops considerably. When the company has a low risk of not getting the money back, it can provide better customer conditions. Before applying for a credit line, it is essential to know how to hire. The first step is to have the documentation updated and know what is required not to waste time. It is worth noting that the process can take a little longer than a conventional loan because it needs to inspect the property. 

Can I Lose My Property?

Yes. It can happen if the customer fails to pay the installments. However, the process of taking good care of the customer is very costly for the bank. So it is the last option for the institution. Besides, the creditor company still runs the risk of not recovering the entire amount lent to the customer. As the asset goes to auction, the sale value is used to repay the debt. The rest is returned to the owner. Therefore, the bank has no profit in this operation. It is also important to remember that a good asset does not earn interest. Not to mention the chance that the bank will take too long to dispose of the property or even sell it. It does not mean that the customer can relax and not meet their commitments. There is still the risk of losing the property and paying off the debt.

What is the Difference Between a Secured Loan & a Mortgage?

The secured loan is also called a property refinancing or home equity. It may be mistaken for the mortgage. Not everyone knows, but these differ in the contract made between the client and the finance company. The mortgage also requires a good to ensure the debt’s extinction, but the process is much more bureaucratic. Many legal barriers make the operation inefficient and unprofitable for the company.

When the borrower mortgages a property to obtain credit, that property remains in his name. It would make it difficult for the financial institution to resume the asset in case of non-payment of the debt. If the company needs to recover the property, it depends on the court decision. The process can take years to recover the loss. Therefore, in recent years, most banks have stopped opting for this feature. In the case of a real estate loan, the owner transfers the property to the creditor institution until the contract ends. It characterizes fiduciary alienation. Therefore, the institution has indirect possession of the property, and the owner continues with direct control (enjoying the property). Thus, the resumption becomes more straightforward with the advantage of being extrajudicial and carried out entirely through the Real Estate Registry Office.

Can I live, rent, or sell the used property as collateral?

You continue to enjoy your good as you wish, even while you are alienated. It remains in the company’s name until the customer finishes paying, but the direct possession remains yours. You can even live and use it as you always have. After the installments are paid off, the property goes back to its name. The owner can also sell the property but must repay the debt, or the new buyer must assume the obligation. This process is documented in a contract and registered with a notary.

What should you know?

These are some terms that you should know before applying for commercial real estate lending –

Debtor: If you apply for a mortgage loan, you are the borrower (the person who receives the lender).

Mortgage lender: The creditor, in this case, is the bank or the financial institution that is legitimately authorized to demand payment or fulfillment of the obligation/debt.

Solidary debtor: It is an additional guarantee that is sometimes requested by financial institutions to grant a mortgage loan.

Loan amount: The loan amount is calculated over a certain percentage of the asset’s value. Each bank or financial institution has its ratio defined. It generally varies between 50 to 70% of the value of the property assigned as a mortgage.

Deadline: It is the period that the financial institution is willing to lend you the money.

Choose a financial institution.

After defining the need for a commercial loan, now you must select the institution that will provide the credit. But don’t be restricted only to the bank. However, other financial institutions also offer cheaper commercial real estate loans. It is always important to pay attention to high-interest charges.

Before getting into debt, keep in mind how to get out of debt. A loan cannot become a debt that you are unable to repay. It is important to note that the value of the installments paid monthly does not exceed 15% of your monthly income.

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