Understanding Commercial Loans
Home loan providers in California understand that purchasing commercial property isn’t a walk in the park. As applicants, our goal could be to buy the first commercial property, expand our real estate portfolio, or refinance a commercial property California. Our businesses could also have outgrown their current storage and office space, and our reason for applying for a loan to refinance a commercial property California could be to get more space near a local warehouse. Of course, we all want to work with a lending firm that has financed all types of commercial properties ranging from apartments, land, R$D, and retail offices. Commercial property lenders are many, and each of them has an appetite for certain types of property.
Some lenders prefer apartment building over medical building while others industrial structures over office structures. Moreover, while some lenders can lend based on owner-user properties, others do not. Home loans can vary and are unique to each commercial property. Today’s commercial property lenders understand the complexity of home loans such as cash flow, condition, and property type and strive to develop solutions that suit the needs of each borrower. Of course, we all want to work with a mortgage advisor that is willing to guide us on the details of our commercial property loan. Commercial property loans are entirely different from mortgage or residential loans. We can expect both the application process and loan terms to differ if we are new to commercial property ownership. Below are a few incredible aspects every borrower needs to know before applying for a commercial property loan.
We always view any commercial real estate project with an eye towards potential even if it is under use or occupied. Prospective buyers or property owners often imagine what a bare land or a building under construction could become under ideal conditions. Commercial property lenders are always concerned about the current state of a property, and that’s what makes commercial property appraisal problematic. As a result, property appraisers are forced to evaluate a building based on its physical state, accessibility, location, and size.
The fluidity of the situation is the most significant difference between a commercial property loan and a conventional home loan. Commercial loans are unique since each commercial property has unique features. As such, we want to work with mortgage advisors who can take the time to understand our loan requirements and situations. That allows for a dynamic evaluation process and enable a mortgage lender to offer loans that other lenders can’t. Our goal is to find a lender that can match up our financial needs with the best loan option.
Our ability to fulfill the terms of a loan is the primary factor that every commercial lender considers when determining our eligibility. That’s what makes lenders establish arbitrary guidelines and dismiss our applications for failing to meet their pre-established eligibility criteria. Of course, we California residents want to work with mortgage providers that don’t generalize details when reviewing our financial history. Instead, we want mortgage lenders that consider various factors and work with us to craft a loan proposal tailored for our specific loan needs.
Debt Service Coverage Ratio (DSCR)
It refers to the amount of money a property generates each month in comparison to the total cost of the mortgage payment. An apartment or bare land can generate income in many ways depending on how we use it. Of course, we all want to analyze our property’s DSCR first so that we can find a lender with the most competitive loan terms that can meet our financial needs. Every one of us wants to borrow from a lender with several decades of experience in purchasing and refinancing commercial loans.
Unlike other types of loans, commercial property loans have a static down payment amount, which is determined by loan amount and property type. As such, our goals as borrowers is to underwrite all our qualifications and property situation thoroughly so that we can find the best lender that suits all our scenarios.
It takes a while to acquire a loan to refinance a commercial property California loans than a residential home. While we can still complete an emergency commercial loan application in four weeks, we should give it between 45 to 75 days depending on the type of loan we need. Those of us who want refinancing for ground-up construction or tenant improvement, we may need more time for the commercial loan to process. However, we as borrowers are urged to discuss timing with our lenders before we lock ourselves into a contract.
Most adjustable loans and fixed commercial rate commercial loans have a provision for a prepayment penalty. As such, it’s wise we understand the potential penalties for each loan before we lock ourselves into a loan agreement. We all need to be keen especially when applying for large loans as they can attract a penalty of up to $250,000. Commercial lenders often gloss over this aspect when they’re presenting us their mortgage, so it’s wise to work with an advocate who can make things clear to us. Penalties can either be a percentage amount or a fixed amount based on how interest rates fluctuate.
Commercial loan lenders often don’t include loan broker fee into the terms of a loan. No one wants to work with a lender who introduces brokerage fee at closing of the loan. Instead, we can work with a lender who includes broker fee to the terms of the loan if we want a mortgage broker to represent us. In these case, the costs of a home loan will remain the same even if a mortgage broker will assist us. As borrowers, we should ask for a written agreement in advance as we are the ones that shall pay the brokerage fee. We need to be careful with each loan detail whether we are the ones to pay the brokerage fee or the lender.
Nothing such as ‘no doc’ exists in commercial loans. As such, we must provide our financial statements and probably federal tax returns and any other information the lender may ask us to avail. On business-related loans, we must avail details such as a debt schedule, business tax returns for three years, accounts receivable and payable, and an updated financial statement. We also need the patience to handle a lot of paperwork throughout the entire loan processing period.
We all expect to get a loan equal to 70% of the purchase price if we apply for a 70% home loan, but this isn’t a guarantee for a commercial property loan. The chances are that the lender and appraiser will value an income property below its purchase price. They usually deduct at least 5 to 10% of the value of income property and use it as management and vacancy reserves. As such, our 90% commercial property loan might end up close to 80% of the value of the property. Nonetheless, this reduction doesn’t apply if we are buying an apartment or office space that our business will occupy.