How Do Traditional Commercial Mortgage Loans Work?


If you have been running your small business for a while now and want to purchase a Commercial property or upgrade an existing property, you might be looking for a commercial mortgage loan. Finding the right Commercial mortgage loan that’ll perfect your needs might seem daunting at the beginning. However, if you do your research well in advance and gear with caution and knowledge, you can get the perfect loan to suit your needs. This blog is an overview of how traditional Commercial mortgage loans work and how to find the best Commercial mortgage for your property.

What are Commercial mortgage loans?

Commercial mortgage loans are similar to traditional housing mortgage loans. Instead of taking a loan for residential purposes, you’ll be taking a loan to fund your commercial property. The security that you provide for a Commercial mortgage loan is a commercial property. A few examples of commercial properties are office buildings, industrial warehouses, apartment complexes, multi-family properties, shopping malls, and the like. Commercial mortgage loans can also be used to make additions or upgrades to an existing commercial property. For example, You may want to renovate your multi-family property to attract better or high-paying tenants.

Who needs Commercial mortgage loans?

Commercial Mortgage Loans can be taken by anyone who runs a business that needs a storefront or a warehouse to store inventory and commercial real estate investors who invest in properties and hold till it appreciates fix-and-flip properties for a profit. For business owners, taking a commercial mortgage loan future proofs their business as properties appreciate over time, and the business would have enough equity in the property.

Lenders who provide commercial mortgage loans

Commercial Mortgage Loans, like any other form of financing, are provided by many lenders in the markets. Banks offer the most conventional form of commercial mortgage loans, which generally carry very competitive rates and are stretched over the long term. However, the qualifying standards for banks are very high, and borrowers who do not have great credit scores are declined loans.

SBA 504 vs conventional loan

However, to uplift Small And Medium businesses, the SBA programs provide commercial mortgage loans too. SBA loans generally carry the least rates and longest term periods. However, the downside of SBA loans is that their qualifying standards are also very competitive, and only a few borrowers who can boast of a great credit score can get these loans. The next type of lender in the market for Commercial Mortgage Loans is the private money lenders who are non-bank lenders.

The reason why many investors choose private money lenders is their simple qualifying standards and faster processing windows. They provide loans for various Commercial real estate purposes to borrowers who might not have a great credit score but can convince lenders of their loan repayment abilities. When banks and other traditional institutions cannot fund your commercial real estate financing needs, private lenders are your best bet. However, as a trade-off for poor credit history or credit scores, the rates for private commercial mortgages are much

The Commercial Mortgage Loan Application Process Simplified

Before you fill out the loan application for your commercial mortgage, check out the pre-qualifying standards of the lenders you want to work with. Most lenders have clear policies about their pre-qualifying requirements. In a typical scenario, most lenders would expect substantial proof of your repayment capabilities, including your lending history, personal credit score, business credit score, income statements, banking statements, income tax returns, etc.

Traditional lenders like banks and SBA programs generally require you to submit the income and tax statements for 3 to 5 years to determine the stability of your business. Apart from these, the majority of the lenders also require you to submit projected financial statements for the next couple of months or a projected financial statement that explains how you plan to repay your loan.

Once you’ve checked out the pre-qualifying requirements from different lenders and are satisfied with your eligibility, you can fill out the mortgage loan forms. Once you submit your application, your lender might ask you to submit more documents to support your loan application. You must be prepared for such documentation and other paperwork. Depending on your credibility, loan amount, property type, property value, LTV ratio, debt coverage ratio, and more, your lender will determine whether or not to approve your loan application.

Banks and traditional lenders generally take a couple of weeks or sometimes months to get back on your loan application status. However, if you choose to work with a private lender, the closing and processing window becomes much shorter. If time is of prime essence to your commercial property investment, going ahead with private lenders will help you get immediate funds without wastage of time.

How do commercial mortgage loans work?

When you get a commercial mortgage loan from a traditional lender like banks or under SBA programs, the average Loan-to-value-ratio expected would be 85%. These loans are best suited for businesses that have been around for at least two to three years and have solid credit. The loan term generally ranges anywhere from 7 years to 30 years, depending on the borrower’s requirements. The rates offered by traditional lenders lie in the range of 5% to 7%. In general, borrowers are expected to have a credit score of 650 and above, with a down payment covering at least 20% of the loan amount.

On the other hand, the requirements of private lenders for commercial mortgage loans are very flexible, where borrowers who don’t have a great credit score too can apply and get a loan approved. The loan terms are generally shorter than traditional loans, ranging from 3 to 5 years with increased rates, ranging from 10% to 20%. If a borrower or an investor is confident about the profitability of their commercial property, choosing a private money lender is the best choice.

Savvy commercial real estate investors often work with private lenders over traditional lenders because they want to leverage at the right time of investing. If you are an investor who is serious about commercial real estate investing, and want to do it full-time, private money lenders can be your best partners. This is because they can bring in many funds and process them in a much shorter time.

Besides, private money lenders are generally very flexible with their terms and conditions. Thus, even if you feel it’s too hard to get your loan approved, you can always bring your negotiation and persuasion skills to the table and convince your private lender to fund your needs. In the end, private money lenders are lenders who are looking for an investor who can bring good business and profits to them. If you can convince them of this by demonstrating a worked-out plan on how you intend to conduct your real estate business and make profits, they might become very keen on lending you the finance you want.

Final Words

Choosing the right commercial mortgage loan is one of the most important decisions you will make as a borrower or an investor. It can determine your future cash flows a great deal, and thus, treading ahead with caution is very important here. Remember that there is no one perfect loan that will match the needs of any real estate financing project. Each project is unique and requires different conditions to be successful. Thus, always look at any financing option strictly in light of your unique financing needs. It is a good idea to work with an expert who can help you navigate your loan approval process and get you the best loan. The type of loan you choose largely determines your investment success in the long run.

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