Commercial Property Loans

Whenever someone purchases a piece of commercial property, unless he or she pays cash which is highly unlikely, a commercial loan will be necessary in order to close the deal. This is not much different than taking out a mortgage in order to buy a home; the only difference is that there will normally be a more stringent approval process as the dollar amount is typically much higher. There are many things that a commercial lender will be interested in such as the type of property, the credit of the corporation or individual applying for the loan as well as the income and expenses for the property.

The First Part of the Application Process
The very first thing any financial institution will require before even considering a commercial loan will be a property appraisal. This will help to give the lender a better idea of the actual value of the property in order to prevent too much money from being invested in the property. Appraisals will also be done when there is a residential mortgage being applied for but the loan to value ratio will be much different when considering a commercial loan. Since commercial properties generate income the lender will have to assess the amount of income the property brings in prior to making a decision on the amount of money to lend. In addition, a commercial property’s value may be based on a number of other factors such as location, structural integrity and a variety of other things. Once the appraisal has been done then the person or entity asking for the loan will be investigated.

Applicant Requirements
As with applying for any type of mortgage a credit check will almost always be a part of the equation. However, in situations in which a residential mortgage has been applied for the credit requirements may not be quite as strict. When it comes to obtaining a mortgage for a commercial property, the person or corporation applying for the loan must show exemplary credit. In addition, if the building is being purchased to house a particular business then the credibility in terms of how successful that business will be will be a factor in whether or not the bank opts to loan the money. For example, a major chain that has a proven track record of success will obtain an approval much faster than a “Mom and Pop” business would. The main thing that a lender is looking for is a guarantee that the person or company borrowing the money will make the monthly payments on time every month without having to struggle.

Down Payment Makes a Difference
Typically, when a commercial property is being purchased the bank will require a sizable down payment before they will even consider approving a mortgage for that property. There are many reasons for this but one of the main reasons that banks look for higher down payments on commercial properties is that it shows a certain financial ability. After all, what bank is going to loan a couple million dollars to someone who cannot even come up with at least 20% of that? With that being said, this is another of the major difference between obtaining a commercial loan and a residential loan. Many times a person can get a mortgage for a home with little to nothing down. This is not the case with commercial loans. The loan to value ratio or LTV is quite different on commercial loans.

In some cases a person who wishes to purchase a commercial property will wind up having to go to alternate financing sources such as private lenders. However, this is usually not necessary unless the person or company looking to purchase the property cannot show a good credit history or is not a citizen of the country in which the loan is being applied for.

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