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About Commercial Mortgage
Now that the businesses are reopening, many business owners are looking for the right mortgage.
Whether you have an office, restaurant, retail store, or other business, you may require a mortgage to have your own business space.
In order to have your own business space, you might need to apply for a commercial mortgage. In this post, we will learn about commercial mortgages in detail.
What Is A Commercial Mortgage?
A commercial mortgage is a loan secured on a property that is not residential such as offices, retail or industrial units, restaurants, etc.
However, they can be used to acquire ‘mixed-use’ properties with both commercial and residential elements.
Commercial real estate loans are most often used by business owner-occupiers who like to own the premises in which their business is based to avoid paying rent.
A commercial property loan is usually a long-term loan of up to 25 years that provides the cash to purchase the business premises.
Commercial mortgages are similar in structure to a residential mortgage in which the commercial mortgage is repaid in monthly installments, along with interest. Interest-only options are also available generally for up to a maximum of ten years.
Commercial lenders prefer investment borrowers to have some previous property investment experience because operating mixed-use or commercial properties are more complex than residential properties.
What Is A Difference between Residential vs Commercial Mortgage?
On a residential mortgage, you can get a 30 year fixed mortgage; however, on a commercial mortgage, you would see that very rarely.
On a commercial property loan, you would typically get a five to ten-year term. On residential mortgages, you would get low-interest rates compared to commercial real estate loans.
On the residential loans, the individual signs the documents himself. In a commercial property loan, you have to sign as the company’s proprietor or company owner.
When it comes to evaluation, the residential loan lenders evaluate the borrower’s income, details, and other important aspects. In a commercial mortgage, the lender will evaluate the business side of the property you are looking to buy.
What Do Lenders Look For In A Commercial Real Estate Loan?
So when a lender is looking to give a commercial loan, they basically look at three things, credit, collateral, and cash flow. Banks usually have very stringent guidelines on each of these.
Banks usually require credit scores of more than seven hundred for you to qualify for a commercial property loan.
The lenders also have very strict guidelines when it comes to collateral. They typically only do properties that are within a certain geographical area, most of the time within their lending area.
They also have stringent guidelines when it comes to property types. Most lenders have their parameters for specific property types.
For example, some of the lenders will look if the property in question is owner-occupied, or sometimes they will see if the property in question is income-producing.
The lenders are also going to look very strongly at your cash flow. If it is an owner-occupied business, then the lender is going to look at your personal tax returns, and business tax, your bank statements, personal financial statements, balance sheet for your business, profit and loss statement, etc.
When it comes to commercial mortgage lending, the lenders will also consider an important parameter known as debt service coverage ratio or DSCR.
DSCR is a relationship between the net operating income of a property and the ability for you to make your debt payments; in this case, it is your commercial mortgage.
It is a ratio that shows how many times more net operating income you have than actual debt service.
If you have a ratio that equals two, this means you have two times more net operating income than the actual debt payments that you may have.
If you have a DSCR of less than one percent, this would mean that your business has negative cash flow.
The typical DSCR that a lender would look at to qualify for a commercial mortgage is anywhere above one a quarter percent.
The lenders want to see that you can cover above and beyond your debt payments usually by 25 to 30 percent.
Conclusion
The guidelines for qualifying for a commercial mortgage may vary depending on the lender.
However, they are more or less on the same basic parameters. If you are looking to buy a commercial property for your business or investment, you need to know that the process of getting a commercial real estate loan is complex and could be expensive compared to a residential loan.
It is suggested to get in touch with a trusted commercial mortgage loan officer who can guide you through the requirements and help you make an informed decision.
I like that you talked about how commercial mortgage is a loan secured on a property that is not residential such as offices, retail or industrial units, and restaurants. I was browsing through a business management book earlier and one of the topics I saw was about commercial mortgage. I heard there are commercial mortgage lenders that could help with businesses, so I’ll try to keep that in mind if ever I get a business of my own.