As a general criterion, mortgage lenders consider some important factors while giving commercial real estate loans. They may base the factors on your previous credit history, current outstanding loan, histories of defaulting, income, etc.
It is very important to maintain a healthy record in all the financial factors in order for one’s portfolio to be presentable and convincing.
The most important thing that gives a clear picture of one’s credit background is the Credit Score. Credit Score ranges from 300 to 850, and higher the Credit Score, easier the loan approval.
A credit score majorly has 5 biggest determinants that reflect your history, responsibility and transactional behaviour.
Credit scores used by credit agencies based on the records on the borrower’s Credit File. Lenders strictly consider this to decide how much they are ready to lend, the period of terms and the rate of interest.
Every agency will come up with a slightly different credit score, but all in the same range, pointing towards the same credit story.
These are the constituents of a Credit Score listed from the most important to the least important, yet important.
Loan repayment history represents a major chunk of the credit score. There is only one important thing for a lender to be sure about while lending money, the surety of getting the money back.
A decent loan repayment record will make the borrower trustworthy for the lender to trust them with the funds loaned.
The following traits affect loan repayment history:
- Repaying instalments and bills on time is definitely a great impression on one’s part. Commercial mortgage lenders, in particular, look for an excellent repayment history, since the property funded for needs to earn the expected returns consistently to recover the complete loan else the borrower must be responsible enough to repay from his/her own pocket.
- Delay in repayment can cause a decline in credit score. More the delay in repayment, more the decline in credit score.
- If any of the previous loans go to the stage of Debt Collection, they grab the attention of lenders, giving them an impression that there could be a problem collecting the loan back. It is necessary to avoid such situations in all cases to be eligible for new credit lines.
- The borrower’s public records must be clean. There should not be cases of Bankruptcy, Debt settlements, Charge-offs or judgments against the borrower. This is very important to establish a clear financial rapport with the lender.
- Even if there were any negative incidents regarding repayments, it needs to be a relatively long time ago. A series of such bad remarks a long time ago will affect lesser than a single remark in the recent past.
A borrower might make all the payments on time and have an impeccable loan repayment record, but if he/she has used up a very big part of the credit limit, it becomes difficult to process a new loan that would make the borrower cross the credit limit.
This is how outstanding loans and credit limit effect:
- The borrower needs to have used a tiny fraction of loan when compared to the credit limit. Having used up a huge chunk of one’s available credit limit while applying for a new loan is definitely inadvisable. Not using the credit line at all is also not so great for a new loan application. Try maintaining an active and low credit line at all times to stand a better chance of getting loans approved easily.
- Credit Score computing software use algorithms that favour individuals who have a mixture of credits. Maintaining such a mixture of regularly paid loans so that the borrower acts responsibly towards Financial transactions.
- The amount of outstanding debt to the actual loan taken is an important fraction considered while testing one’s credit score. Essentially, this fraction needs to be less to get a new commercial mortgage.
Duration of Credit Line
The Credit score also depends on the duration of your credit line. The older your financial history, the more dependable you are. It is important to keep the oldest account you have active and also to maintain it very well.
It is unnecessary that you have a long credit history with default on payments. Otherwise it okay to have a short credit history with timely payments and low outstanding debts.
It is advisable to keep credit card accounts open, even if you don’t use them. These accounts age in time and keep boosting your credit score.
New Credit lines
Credit agencies will look at the number of new credit accounts you have opened recently and all the applied credit accounts to look for any red flags.
When an individual applies for a new line of credit, the lenders will look up for your credit information. There are typically two types of inquiry; soft inquiry, which is as simple as looking up one’s own credit information and hard inquiry, which is an in-depth report on all of one’s credit lines.
Every hard inquiry will dip the individual’s credit score by some points temporarily. When there are a series of credit line applications, the score drop is sudden and a large one.
When a borrower applies for several credit lines, there are possibilities he or she might plan to take on debts that exceed their credit limit for the reason it may be.
The lenders look at this as a potential credit risk and thus reject the application. Since lenders do not know of any other way to determine the amount of credit risk, a borrower can be, apart from the credit score, one will need to improve their credit score in due time.
Credit agencies like FICO look at your hard inquiries as old as 12 months. Controlling applications made in a year can bring up one’s credit score evidently.
Types of existing Credit Lines
The least contributing factor in a credit score is the different credit lines that an individual maintains. There needs to be a mixture such as instalments, mortgages, credit cards, personal loans, etc. to boost a credit score by about 10%.
It is not too important of a factor if you happen to be starting your initial credit lines, but this becomes relevant with time.
Factors that don’t affect the Credit Score:
• Gender, Race, Color, Religion, or Nationality
• Occupation, employment an employment history.
• Marital status
• Child support or family support
Things to remember before you apply for a commercial mortgage loan.
- Keep your loan repayment history clean – Pay your instalments regularly and on time. Delay in instalments will lead to a low score, thus lead to a delay in a loan approval. Don’t delay over 30 days
- Keep Credit Utilization Ratio in check – Make sure that the outstanding credit lines are lower than 25% of the credit limit.
- Restrict on new credits – Try to avoid frequent applications in 12 months. Try distributing your applications throughout the year to avoid clogging
- Check your credit scores in advance – If you have plans of undertaking major projects, properties, and commercial spaces and need to apply for such huge commercial mortgages, make sure you check your credit score around 6 months beforehand. This gives time to improve your credit score if it is lagging.
- Aim for a gradual improvement –
- If the credit score is low, it does not mean it can’t be improved. Work on your payment schedules, and applications and build a portfolio gradually.