Commercial real estate loans allow investors to buy owner-occupied, as well as income-producing, commercial properties. The duration of commercial real estate loans vary, having terms between a few months to 30 years, and the fees and interest rates can be just as varied. Borrowers should know the type of commercial real estate loan can also affect the types of properties that investors can finance.
When seeking commercial mortgage financing, you will first want to know if you qualify. Mortgage lenders will review a plethora factors in order to determine if you qualify for a commercial property loan, including:
- Property value
- Loan-to-value ratio
- Debt-service-coverage ratio
- Net worth
- Credit rating
While each commercial mortgage lender may have different requirements, many share the same prerequisites before granting an investor a loan. Some exemptions exist, but most buyers will need to meet these five requirements in order to qualify for a commercial mortgage loan.
- A credit score of over 680
- No recent bankruptcies, foreclosures, or tax liens
- A minimum cash down payment of 10%
- The business should be over 3 years old
- The business should have a debt service coverage ratio (DSCR) of at least 1.15
As an ideal candidate for a commercial mortgage loan, your main goal will be to get the lowest rate and best terms possible. But how exactly can borrowers obtain the best terms possible on a commercial mortgage loan?
Important Questions to Consider
If you want to get the best rate, you need to discuss the many loan terms with your commercial mortgage lender. Some important questions you need to consider include:
- Is the rate fixed or adjustable?
- Are you looking for a short-term loan or long-term permanent financing?
Your qualified commercial mortgage lender needs a clear understanding of your investment time horizon in order to provide a term that can meet your needs. For instance, are you looking for a recourse loan or a loan without a personal guarantee? In this case, you may want to secure a non-recourse loan.
You will also need to consider the fees and closing costs involved in closing. A lower rate may seem attractive and ideal until you factor in the costs involved, which could affect your ROI. Furthermore, some commercial mortgage lenders do not deliver on their promises and change terms during the underwriting process of your loan.
What Commercial Mortgage Lenders Look For
If you want the best rate, consider these factors that lenders look for when determining commercial mortgage rates.
- Property Location – Many lenders prefer large metropolitan or suburban areas. Lenders consider loans in rural areas risky because these properties are harder to rent.
- Lease Terms – Are the tenants signed to long-term leases or are the leases expiring shortly? Long term leases guarantee cash flow during the term of the loan. Has lease turnover been low? Again, low turnover suggests a property that is not hard to lease.
- Cash Flow – How is the historical occupancy and cash flow? Lenders like properties with constant positive cash flow and good occupancy history. Major fluctuations in cash flow cause concern for lenders.
- Property Condition – Is the property in good condition or does it need repairs and/or renovation? A property in need of repairs could create a cash drain and affect the ability to pay the mortgage.
Obtain an Ideal Commercial Mortgage Rate Today
You should choose a lender that specializes in the type of loan you are requesting. Your lender should have a proven history of providing quality loans to investors seeking commercial mortgage financing. Hunt Mortgage Group has a 43-year track record as a leading, full-service commercial real estate finance and investment company. For more information about securing an ideal rate for a commercial mortgage loan, contact Hunt today!