The commercial loan process vastly differs from the common home mortgage loan processes. Commercial loans are not backed by governmental entities, and so most commercial lenders are risk-averse and charge higher interest rates than on a comparable home loan. Before the borrower makes a purchase, there are many questions to address when applying for a commercial loan. To ensure clients ask all the right questions, Hunt Mortgage Group offers the following factors to consider.
Meeting Loan Repayment Terms
Bank loans typically require borrowers to repay the entire business loan off earlier than their full term by including a balloon repayment in their loans. The borrower pays interest and principal for the first few years and then repays the rest of the balance in one large payment. However, it is common that a borrower will not have enough money in the allotted time. Thus, they re-qualify for their loan or refinance it before the balloon term. Non-bank lenders usually offer less strict credit requirements for commercial loans or will even make long-term commercial loans. While these loans have a higher in interest rate, they do not necessarily require a balloon payment; in fact, you can pay them steadily for years after.
Determining How Much to Borrow
You should estimate the approximate amount to borrow based on your current needs. Also, borrows need to understand most loans do not allow second mortgages. A traditional acquisition loan occurs in the instance a borrower purchases a new property. The required down payment of a traditional acquisition loan falls between 20-25% of the cost. Meanwhile, non-traditional loans require smaller down payments. As a result, the loan-to-value (LTV) cost is higher at 85-90%. Meanwhile, non-traditional loans are usually offered by direct commercial lenders or pools of investors. Be sure to pay particular attention to the adequate capital to meet cash-flow needs, as this can lead to failure of small businesses.
Depending on the amount of loan you request, different commercial lenders will be tentative to fund the loan. Small businesses borrowing less than $2 million will be placed in a different pool of potential lenders than that for businesses borrowing over $5 million.
Deciding the Down Payment
There are many types of commercial real estate loans available, each with specific terms and qualifications. For owner-occupied commercial real estate, this can include office, retail, industrial, and hospital properties. Overall, a commercial real estate purchase is not much different from buying a home; but keep in mind the obligation to provide a down payment. Most residential mortgage loan policies have a 20% down payment or loan to value criteria, assuming that the borrower will provide that much down payment initially.
However, LTV values can vary with commercial real estate purchases. Some commercial lenders require a minimum of 30% down payment before considering or approving a loan application. When buying commercial property as an investment, your LTV cost will decrease and in turn, will likely require the borrower to put more money down. Borrowers should aim for a high LTV or put the least amount of money down. Make sure that your property is in your price range so that you can easily service the loan. Borrowers will also need to consider their ability to pay the loan. Having a large down payment requirement reduces the potential monthly payments, but you still have to be able to make all those payments. Finally, keep in mind the property itself and its future collateral.
Purchasing Commercial Property Through Hunt
In understanding elements of buying commercial real estate, borrowers need to remain mindful of the down payment requirements, as well as their ability to pay monthly and past revenues while considering the use of the property. Hunt Mortgage Group is considerate of each client’s factors when determining the proper down payment rate for lending. For more information regarding commercial real estate loans, contact Hunt Mortgage Group today!