2017 Guide to Finding the Best Commercial Mortgage Loans & Lenders
Your business needs a place to grow, a more visible storefront, or a more spacious warehouse. Purchasing a property for your company is a top priority for many people and for good reason.
Getting a great mortgage for commercial property can give you a leg up when it comes to boosting your sales or making customers feel more comfortable with your brand.
The question is, where can you go to find the best commercial mortgage? It seems that resources for a personal mortgage are significantly easier to find, but finding a source for commercial real estate lending can be difficult.
Image Source: Commercial Loans & Lenders
We want to help you learn the tricks of the trade when it comes to identifying the best commercial real estate loans and knowing how to receive them. Our objective guide on how to find the best commercial mortgage will teach you how to look for commercial real estate lending and help you to connect with knowledgeable commercial mortgage lenders.
When your business is ready for its first (or second or third) commercial mortgage, we’re here to help you navigate the waters of your business mortgage.
What Kind of Commercial Mortgage?
Similar to purchasing a personal property, there are several different types of commercial real estate loans available from lenders. Understanding the differences can assist you in requesting the appropriate commercial real estate financing from potential commercial mortgage lenders.
What kind of commercial real estate mortgage would best suit your business when it comes to terms and repayment?
Before you decide on the right type of commercial real estate loans for your company, you need to know how much of the space your specific company will occupy. In your new building or area, does your business occupy more than half of the space?
This qualifies you as owner-occupied, giving you more flexibility in terms of the commercial mortgage options available to you. Only owner-occupied real estate is eligible for Small Business Administration loans.
The second type of commercial real estate loans would be considered investment or income-producing properties. In this instance, the owner intends to lease more than half of the space out to other businesses. The most common commercial real estate lending choice for this type of purchase would be a traditional commercial mortgage.
The traditional form for a business mortgage looks somewhat like a conventional mortgage. It typically comes with a repayment term ranging from five years to twenty-five years.
The rates for commercial mortgage loans are usually variable, ranging from 4.5 percent to 7.5 percent. You may find many options on these types of real estate loans that feature very low monthly payments through the duration of your loan term and a balloon payment at the end.
Alternatively, some programs for real estate loans (including the CDC/504 loan from the Small Business Administration) can combine different types of commercial real estate loans.
This option for a commercial real estate loan features one mortgage from a commercial mortgage lender that will sometimes feature a fixed rate and could have the same balloon payment as above. The second loan, issued from the CDC, has a fully amortized commercial mortgage and a fixed rate.
How Much Can I Finance?
Obtaining a commercial mortgage comes with a significantly higher upfront cost than a residential mortgage will. In fact, the number may take some by surprise and automatically disqualify you from applying for most commercial real estate loans.
In general, the amount you can finance is determined by the loan to value ratio (LTV). For example, if you purchase a $100,000 property and finance $80,000, your loan to value ratio would be 80 percent.
When it comes to a commercial real estate mortgage, your LTV typically needs to be significantly lower than it is for residential mortgages. A business mortgage loan will often require the company’s commercial mortgage to come in between 65 and 80 percent.
A mortgage for commercial property will also take a close look at the debt-service coverage ratio (DSCR). This second ratio measures the company’s ability to repay their business mortgage in full.
Commercial mortgage lenders will divide the annual net operating income by the annual mortgage debt service (both your principal and your interest) to determine how efficiently and likely you are to repay commercial mortgage loans.
To give you an example, if your net operating income is roughly $250,000 but your annual mortgage debt service is $100,000, your DSCR would be 2.5. Most commercial real estate loans will require you to have a DSCR minimum of 1.25.
Any numbers less than one demonstrate that you would not have enough funds from your annual net operating income to cover the annual fees for the commercial mortgage.
Qualifications for Commercial Real Estate Loans
As in most financing, each lender will have its own set of stringent requirements that borrowers must meet in order to qualify for their business mortgage loan programs.
However, they are loosely based upon the same criteria.
Some of the numbers may differentiate among commercial mortgage lenders, but if you’re considering applying for a commercial real estate loan, you should meet these requirements:
- Personal credit score of 680 or higher: An important criteria for commercial real estate loans is your personal creditworthiness. Low credit scores could indicate to lenders that you will have a difficult time repaying your commercial real estate loan.
- No recent financial problems: If you’ve recently filed for bankruptcy, had a foreclosure, or have tax liens filed against you, this could disqualify you from receiving a mortgage for commercial property.
- Cash down payment: This should help you to reach the loan to value ratio required by that specific lender. In most cases, you will need to put down at least 20 to 35 percent, depending on the type of commercial mortgage you are applying for.
- Business history: Your business will likely need to be in operation for at least three years before being issued any commercial real estate loans. This allows lenders to see consistent growth and to more accurately assess your annual net operating income.
- DSCR of 1.25 or higher: Banks want to know that you can repay your business mortgage, and this indicator is a critical litmus test.
You may find programs that will be slightly more lenient on these qualifications for a mortgage for commercial property. Still, you should be prepared to prove that you are more than capable of repaying your commercial real estate loans with ease.
Small Business Administration Loans
When it comes to receiving commercial real estate loans, you have some other options.
The Small Business Administration doesn’t offer financing directly through its organization, but the backing of this federal agency helps to provide business owners with more favorable loans.
These aren’t often discussed when it comes time to search for commercial real estate loans, but it is an avenue that should be explored thoroughly.
The Small Business Administration (SBA) has an extremely stringent set of requirements for businesses hoping to receive one of their real estate loans.
They offer several programs for business loans, but a commercial real estate mortgage is most likely to fall under their 7(a) loan program or their CDC/504 loan program.
Image Source: SBA.gov
7(a) Business Mortgage Loan
This program allows you to borrow a maximum of $5 million if your business is eligible. Ineligible companies would include those that sustain a significant source of income from legal gambling, private clubs, political or lobbying activities, and more.
You can view the full list on the SBA website. If you do fall into the narrow segment of companies that qualify, you can use this program as a commercial mortgage for purchasing a new property, building a new property, or renovating an existing property.
When using this as a commercial mortgage, you can borrow up to $5 million with no set minimum. The average amount handed out by lenders in the previous year was $371,628. You’ll also incur additional fees ranging from 0 to 3.5 percent based on the loan amount issued.
Keep in mind that real estate loans from the 7(a) SBA loan program will be guaranteed by the Small Business Administration up to 85 percent on loans of $150,000 or less and 75 percent on loans greater than that.
Commercial real estate loans through this avenue can take significantly longer to obtain, with turnaround times ranging from weeks to months. If you are in need of fast commercial real estate financing, this isn’t likely to be your top choice.
However, it does feature low rates for a business mortgage and longer repayment terms to keep your monthly payment low.
CDC/504 Commercial Mortgage
Slightly less popular but still with stringent guidelines, the CDC/504 loan program from the Small Business Administration is another option for commercial real estate loans. For the full list of requirements, you can view the list from the SBA here. Specific criteria for businesses that are searching for a commercial mortgage through this avenue must meet the following criteria:
- Have a net worth less than $15 million and a net income less than $5 million after taxes for the previous two years
- Operate as a for-profit company
- Cannot participate in speculation or rental real estate
- Meet the requirements for eligible businesses
- Not have funds available (in part or in full) through other sources
504 loans from the SBA can be used in lieu of a commercial mortgage for purchasing land, making land improvements, constructing new facilities, or renovating pre-existing ones.
The maximum amount is determined by how the funds will be used when it comes to commercial real estate loans. Though your business may not qualify for this amount, the maximum debenture overall is $5.5 million.
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Commercial Mortgage Lenders
Knowing which companies can offer the commercial real estate loans you need is a tricky endeavor. Many traditional financial institutions have the capability of offering the Small Business Administration loans that could be used as a commercial mortgage for your company.
However, more and more frequently, individuals are enjoying the flexibility that online banks and lenders have to offer. In light of that, we’ve put together a brief review of two of the more popular choices for commercial real estate loans from online lenders.
One of the more popular choices in lenders for a small business commercial real estate loan is the company SmartBiz Loans™. SmartBiz offers a Small Business Administration Commercial Real Estate loans as well as 7(a) working capital loans.
For commercial real estate, you can choose to borrow anywhere from $350,000 to $5 million with this online lender with commercial real estate lending rates ranging from 5% to 6.25% * over the course of 25 years. Be prepared for their fees, though. Those will run an additional 1% percent (0.5% packaging and 0.5% referral) plus your closing costs.
When it comes to qualifying for a traditional commercial mortgage, you can prequalify without affecting your credit score. When all is said and done, funds can be wired for closing in as fast as 30 days after credit approval depending on how quickly you supply all documentation required.
Additionally, the real estate must be majority owner-occupied. This means at least 51% of the square footage of the property you’re buying or refinancing must be occupied by and used by your business.
*Loans have a variable rate of Prime Rate plus 1.50% to 2.75%.
Image Source: Smartbizloans.com
Fundation offers slightly more funding options with potential loans ranging up to $500,000 but their borrowing terms aren’t quite as favorable. Where SmartBiz will allow a repayment term of ten years on their commercial real estate loans, Fundation is only set up for repayment terms ranging from two to four years.
Not only that, but their fixed interest rates start at 7.99 percent, so you are paying significantly more in interest.
Fortunately, there is another benefit to Fundation as well. Where a loan from SmartBiz could take up to six weeks to process, Fundation can fully fund your loan in as few as three business days. In order to qualify, you will need to have a personal credit score of at least 600, annual revenue of $100,000 or more, and at least two years in business.
Image Source: Fundation.com
Qualifying for a commercial mortgage can be a stress-inducing experience, but it can provide significant benefits to your business. The best commercial real estate loans keep your monthly payments low and affordable while providing you with a great new space to promote your product or business.
Hopefully, your annual revenue will increase with the move to a new property and help you to cover your commercial real estate loan with ease.
Figure out which type of real estate loans would best suit your company and then find a lender that offers those commercial mortgage loans. Get all of your documentation in order for efficient commercial real estate financing that moves smoothly.
It can be a time-consuming endeavor, so be prepared in advance.
When your business is ready for a commercial mortgage, it’s time to get serious. If you need a mortgage for commercial property, consider some of these tips for figuring out how to get the best possible commercial real estate lending terms.
AdvisoryHQ (AHQ) Disclaimer: Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info. Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.