The loan approval is required before the commercial real estate transaction can close. A low interest rate can help improve cash flow. The more you understand about commercial loans, you will be able to make better decisions about commercial real estate investments.
Loan Qualification Almost everyone has applied for a home loan. The lender will need to see the following:
- It can verify your income by requesting W2’s or tax returns.
- So it can verify your liquid assets as well as the down payment, bank and/or brokerage statements.
The more income you have, the greater the loan amount that you are eligible for. With sufficient income, you could borrow 95% of the price of a 1-unit principal residence.
A lender will approve a commercial loan amount based on the net operating income (NOI), and not your personal income. This is the main difference between commercial and residential loan qualification. Because the property does not generate rental income, it will be difficult to get a loan approval if you purchase a vacant commercial building. But, you can still get a loan approved if the property has no rental income.
- You can apply for an SBA loan if you occupy at least 51% space. Credit fulger aprobat online
- You should have sufficient income from other commercial properties as cross collateral. There are lenders who want your business.
Loan To Value: Commercial lenders are more conservative with the loan-to-value (LTV) ratio. Lenders will only lend you the amount that is equal to the NOI and mortgage payment. This ratio, also known as Debt Coverage Ratio or Debt Service Ratio, must be at least 1.25. The NOI must be at least 25% higher than the mortgage payment. The loan amount must be such that your positive cash flow is equal to 25% of the mortgage payment. To meet the lender’s DCR, a lower cap rate property will require a larger down payment. California properties with a 5% cap require at least 50% down payment. Some lenders advertise a 1.25% DCR, but underwrite loans with an interest rate that is 2% to 3% higher than the note rate. Most commercial lenders prefer to keep the LTV below 70% since the financial crisis of 2007. For high-quality properties that have strong national tenants (e.g. Walgreens and in areas the lenders are familiar with. You will not see a higher than 75% LTV. Commercial real estate is only for elite investors. There is therefore no 100% financing.
Interest Rate – The interest rate for commercial is affected by the following factors:
- Loan term: The shorter fixed rate of 5 years is less than the longer fixed rate of 10 years. If the property is leased to a credit tenant for a long time, it’s difficult to obtain a loan with a fixed rate that lasts more than 10 years. Walgreens. Most lenders offer amortization for 20-25 years. Some credit unions offer 30 year amortization. Lenders may offer 10-15 year amortization for single-tenant properties.
- Tenant credit rating
- Type of property: A single-tenant nightclub building will have a higher interest rate than a multi-tenant retail strip due to the higher risk. It’s more difficult to rent or sell a nightclub building when it is foreclosed than a multi-tenant retail strip. Apartments are more affordable than the shopping strip. The rate for apartments is lower because everyone needs a roof over his head, no matter what.
- The property’s age: A loan for a newer property will be charged a lower interest rate than if it is in disrepair. The rate will be higher if the property is older because it is more risky.
- The rate will be lower if the property is in a developing area such as the Dallas suburbs than it would be if it was in a rural area in Arkansas. Another reason to research the demographics of the area before buying the property is that it’s more expensive.
- Credit history: Similar to a residential loan, rates will be lower if you have a good credit record.
- Borrow less money: A residential mortgage will allow you to borrow less money. A conforming loan will have the lowest interest rate. If you borrow more money (i.e. Your rate will go up if you get a super or jumbo loan. Commercial mortgages are the opposite! Your rate of interest could be as high as 8% if you take out $200K. If you borrowed $3M, however, your rate may be just 4.5% It’s almost like buying large quantities of Costco products at a lower cost.
- You should choose the lender to whom you want to apply for the loan. Each lender has their own rates. The interest rates could vary significantly. The interest rates charged by hard money lenders are often the highest. To get the best rates, you will need to work with someone who specializes in commercial loans.
- Prepayment flexibility: You will need to pay a higher interest rate if you wish to be able to prepay the loan. The rate will be lower if you agree to extend the loan term.
Residential loans can be exempted from the various consumer laws that apply to commercial loans. In computing mortgage interest, some lenders apply the “360/365” rule. This rule allows for interest rates to be calculated on 360 days per year. The interest payment is calculated on 365 days per year. This means that you will have to pay 5 additional days (6 days for leap years) of interest each year. Because the effective interest rate is lower, your actual interest payment will be higher than what is stated in the loan documents.
Prepayment penalty: A prepayment penalty is an option for residential loans. You will pay a higher rate if you do not want it. Prepayment penalties are a common feature of commercial loans. Prepayment penalties are reduced or lowered each year. Prepayment penalties for 5 year fixed-rate loans are 5% and 3% respectively. The prepayment penalty is reduced to 4%, 3%, 22%, and 1% for the 3rd, 4th, and 5th years, respectively. Conduit loans have a large prepayment amount. You must pay the interest between the US Treasure rate and the note rate to cover the entire loan balance. This is known as yield maintenance or defeasance.
Loan Fees If you are paying a higher interest rate, some lenders might offer a “no point, no cost” option. Commercial mortgages do not have this option. You will have to pay between 1/2 to 1 point loan fee, appraisal cost, environment assessment report fee, and processing/underwriting fee. If a lender is interested in lending money to you, it will usually issue a Letter Of Interest (LOI). The LOI details the loan amount, interest rate and loan term, as well as fees. The lender begins underwriting the loan once the borrower has paid about $5000 for third-party reports (appraisal phase I, survey) and loan application fees. The lender orders its own appraisal with its pre-approved MAI appraisers. If you decline the loan, the lender will keep all fees.
Loan Types : Although there are many types of commercial loans, most investors will encounter three main types:
1. SBA Loans for Small Businesses. This loan is guaranteed by the government and is intended for owners of occupied properties. This program is available to you if you own 51% or more space in the building (a gas station, hotel or other similar property is considered owner-occupied). You can borrow as much as 90% of the purchase price.
2. Portfolio loan. This type of commercial loan is where the lender uses their own money. They keep the balance sheet up to maturity. Because it is their money, lenders are more flexible. Portfolio lenders include US Bank, East West Bank and certain life insurance companies. For the loan to be paid, these lenders require that the borrower provide a personal guarantee. These loans can also be called recourse loans.
3. Conduit loan, also known as CMBS (Commercial Mortgage Backed Securities) loan. This was a popular commercial loan program before the 2007 recession. Its market value was more than $225 billion in 2007. In 2009, it was only a few Billion. However, it is now making a comeback in 2015 with almost $100 Billion of issuance. Many loans, of different sizes and locations, are combined, rated from Triple A (Investment grade to junk) to B (Junk), and sold to investors around the globe as bonds. Because the loan is already part of a bond, it can’t be prepaid. These are the characteristics that conduit loans have: