Learn how to qualify for a commercial real estate loan.
- To be eligible for a commercial real estate loan, applicants must typically have a credit score of at least 660.
- Term loans, SBA loans, lines of credit, and portfolio loans are all options for lending on commercial real estate.
- Commercial real estate loans normally have maturities of five to ten years, but they may have a substantial balloon payment due at the conclusion of that time due to the fact that they amortize over a period of up to 25 years.
- This article is for business owners who require a commercial real estate loan to buy a structure or modify an already existing property for their company.
A commercial real estate loan is a form of finance used to purchase real estate for commercial usage. You must have strong credit, put down 25% or more, and intend to utilize the bulk of the financed property for your own business in order to qualify for a commercial loan.
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What will you need a commercial real estate loan for?
Despite the fact that the majority of people link commercial real estate loans to buying commercial property, these loans have other, more particular purposes. Commercial real estate loans are intended to help you pay for the acquisition or improvement of real estate that will be utilized for your own company. You must use the bulk of the property used as security for the loan for your own business in order to qualify for a commercial loan.
This implies that even if you can still lease out a portion of the underlying land, your firm must utilize at least 51% of it. On the other hand, since this is a more speculative operation, if you want to lease out 50% or more of a space, you will need a different kind of financing.
A commercial real estate loan may be acceptable in the following situations:
- Purchasing a workplace to host your company
- extending or moving your store’s retail space
- acquiring a warehouse to keep your stock
- purchasing, constructing, or remodelling a hotel that you will manage yourself
Types of commercial real estate loans
Commercial real estate can be financed using a number of different forms of loans. Rates, conditions, eligibility restrictions, and application procedures vary depending on the selection. Decide which form of loan is best for you before submitting an application. Consider the following choices:
There are a number of loan options available under the SBA programme that may be used to purchase, construct, or repair commercial real estate. However, the SBA 504 Loan Program was created with this objective in mind. Although real estate can potentially be purchased or improved with the help of 7(a) programme funds, this isn’t the best way to finance real estate.
It’s also vital to keep in mind that landlords who own a variety of properties that they rent to tenants sometimes employ portfolio loans. The prices, conditions, and eligibility requirements for this are different, and lenders view it as a more speculative activity. Before discussing portfolio loan alternatives with a lender, be clear whether your company has various facilities that you utilize for your personal needs.
Choosing a commercial real estate lender
It’s crucial to locate a lender that not only offers the sort of loan you want but also has rates you can afford and qualification standards you can fulfil when applying for a commercial real estate loan because there are many different loans and lenders to select from.
When choosing a lender, keep the following in mind:
- choices for loans available
- initiation costs
- interest rates at launch
- needs for documentation
- Time-in-business specifications
- Early payment fees
- Personal-guarantee standards
- choices with quick funding or poor credit (if you need them)
- Ratings from the Better Business Bureau and client complaints
Commercial real estate loan requirements
Loan approval for commercial property is considerably different than loan approval for a residence. Lenders want to be confident that your firm can afford the loan payments because you’ll be utilizing the property for commercial purposes and paying the loan back with business earnings.
There are three primary categories of loan eligibility requirements:
1.Security
Your lender will want to be sure that the property you are borrowing against is adequately secured before authorizing a loan. This implies that in order to qualify, you will often need to have between 25% and 30% equity in the property you wish to purchase.
Additionally, your lender will want to confirm that you have sufficient property insurance to guard against property damage (their collateral). To ensure there are no existing liens or other claims against the property, the lender will also perform title work on the property and review the deed. What Is a Lien? is a related article.
2. Income
Lenders want to see that you have a lot of income compared to your costs when processing your application so they can be sure you can afford your loan payments each month. Your debt-service coverage ratio is one factor that lenders consider while making this assessment (DSCR). Depending on the asset you are borrowing against, the minimum DSCR varies, although most lenders want a DSCR of 1.25 or greater. 8 Things That Prevent You from Getting a Small Business Loan is a related article.
Since you’ll be borrowing the money for business purposes but also need to sign a personal guarantee, you’ll need to supply your lender with two years’ worth of tax returns to prove your income. Usually both your personal and company returns are required. A W-9 form and a copy of your birth certificate or passport are required as well as organizational paperwork for your business and your operating agreement.
3. Credit
Your lender will probably want to look at your business credit score if you’re applying for a loan for real estate for your firm. The majority of the time, lenders will also need a personal guarantee from you, therefore they will also want to examine your personal credit.
For the majority of conventional loans, the required credit scores range between 660 and 680, depending on the lender.
Lenders will want to know how long you have been in company in order to evaluate your credit risk in addition to running a credit check on you. Typically, you need to have been in company for one or two years to be eligible for a commercial loan. In this manner, the lender can have faith in the revenue of your company, which will serve as the main means of loan payback. How to Establish Business Credit is a linked article to this one.
How are commercial property loans different from consumer loans?
Loans for commercial real estate are considerably distinct from personal (consumer) loans. These loans have highly varying collateralization and underwriting requirements, along with variable rates, periods, and other features.
One difference between securitizing commercial loans and securitizing personal loans is the sheer number of schemes available. Because investors would be taking on the risk of loss in the event that the borrower defaults on the loan, lenders are often forced to hold onto a large portion of these loans after they are provided.
As a result, when making commercial loans, lenders take far less risk. Both down payments and the required minimum credit scores are often higher. Commercial loans often have higher income criteria and interest rates because mortgage insurance is not an option.
Furthermore, compared to personal loans, business loans often have shorter terms. Commercial real estate loans typically have maturities of five to ten years, as opposed to housing loans, which are typically provided for lengths of up to 30 years. However, as loan amortizations can sometimes be longer than the usual 25 years, borrowers are frequently left with balloon payments at the conclusion of their loans that they must either pay off or refinance.
Commercial real estate loan FAQs
Small company owners sometimes get lost in the specifics of commercial loans since they are far more complicated than traditional house loans. We’ve attempted to address some of the main points of uncertainty for borrowers in order to be of assistance. Following are responses to some of the most often asked questions:
What’s the minimum down payment for a commercial real estate loan?
Most commercial loans need a minimum down payment of 25% of the acquisition price of the property (not including closing costs). However, if you combine a property loan with mezzanine financing, your down payment may be as low as 15%, or it might be as low as 10% if you utilize an SBA loan.
How long do commercial real estate loans last?
Loans for commercial real estate often have terms of five to ten years. However, loan amortizations can sometimes last up to 25 years, which is a lot longer. While this results in far cheaper loan payments than if they were to be repaid in five or ten years, it also means that the borrowers will have a debt owing at the end of their loan term, at which point they must refinance it or pay it off in full.
Can you use an SBA 7(a) loan to buy real estate?
The SBA’s 7(a) programme does technically permit the use of funding for real estate (to buy, build, renovate or expand). These loans, however, are not intended for that use; for instance, real estate is not used as security for them. These loans are thus often more expensive than alternative lending choices, such as SBA 504 loans.
What credit score is needed for an SBA loan?
Typically, a credit score of 660 is needed to be eligible for an SBA loan. The minimal score for SBA 504 loans is typically 680.
Another thing to be aware of with SBA loans is that the organization is meant to serve as a lender of last resort rather than as a lender of first option. You should look for funding from other lenders before submitting an application for a loan from the SBA.