Commercial Mortgage Loans 101: What You Need To Know
by Arnab Dey Loans & Credit Published on: 01 March 2023 Last Updated on: 07 November 2024
Investing in commercial real estate is a big financial move.
Whether buying property to run a business or as a general investment, you want to make an informed decision as early as when choosing your financing options. Commercial mortgages are a popular solid source of funding for commercial real estate.
Commercial mortgages are business loans that fund you to purchase commercial property. You can use the mortgage to buy land for development, rental, or business properties. Obtaining real estate commercial funding is a detailed process requiring you to understand the basics of commercial mortgages.
Let’s look at everything you need to know about a commercial mortgage.
What Is A Commercial Mortgage?
Commercial mortgages are a form of real estate financing. Lenders fund you with capital for significant business expenses like buying buildings and land, expanding or renovating, and sometimes buying related equipment.
Mortgage lenders include banks, credit unions, asset-backed trusts, private financial institutions, and government-sponsored entities.
Types Of Commercial Real Estate Financing
There are multiple types of commercial real estate financing. The best commercial mortgage for you will depend on your business and financial situation.
1. Bridge Loan (Short Term)
A bridge loan is a short-term financing option allowing you to move on with a deal before finding a permanent funding solution. Businesses commonly use bridge loans to free up some funds from selling another piece of commercial property.
A bridge loan typically has a shorter repayment term, often 12 to 18 months.
2. Term Loan (Short – Long Term)
A term loan in commercial real estate requires you to repay a fixed amount of cash in a defined payment schedule. This form of commercial financing usually has a predetermined maturity date and an amortization schedule. Common options include:
- Conventional, short-term mortgages – one to fifteen years. Short-term loans are similar to residential mortgages, but the terms are shorter.
- Conventional, long-term mortgages – fifteen to thirty years
- 504 loans for smaller businesses that occupy or own the majority of their property – ten to twenty years
3. Debt-Service Coverage Ratio (DSCR) loans
DSCR loans are used to purchase multifamily properties and commercial real estate. This loan is a unique form of financing based on a business’ monthly revenue compared to its debt payments.
DSCR loans are an excellent option for commercial real estate because the merits are based on future cash flow, making qualifying easier. Rather than counting on personal assets, DSCR loans are based on your property income.
4. Other Types Of Commercial Mortgages
There are many other options for commercial real estate funding, including:
- Long-term rental loans
- Vacant land loans
- Rehab and renovation loans
- Fix-and-flip loans
- Ground-up construction loans.
How To Obtain A Commercial Real Estate Loan
Securing a commercial mortgage is a precise gradual process. You can either handle this alone or seek the services of a professional commercial mortgage broker to take you through each state.
- Qualifying Process – This is where the lenders your mortgage broker has chosen will evaluate your business and personal financial history, lines of credit, the purpose of the loan, and debt-service ratio, among other factors. If you get pre-approval, you can move on to the next stage.
- Submitting Your Loan Application – Pre-approval is followed by submitting your loan application. A loan application includes all the requisite financial statements, including income and tax documentation for the last three years.
- Review Of Your Application – Upon receiving your application, the loan officer will analyze your business and personal collateral, your credit history, projected income, and all other financial documents.
- Underwriting: The loan officer, after review, will forward your application to the institution’s underwriting team. They will evaluate and decide whether to decline or approve your loan.
- Decision: This is the final stage, where the decision is passed to you. If approved, this will include information on the loan terms, loan-to-value ratio, monthly payments, interest rate, and closing rate.
When a commercial mortgage broker handles your real estate financing, they usually simultaneously carry out the application process with multiple organizations to increase your chances.
Secure Commercial Real Estate Financing
Commercial mortgages are an excellent avenue to begin or fund your business. If you meet the qualifications, then this form of financing is worth considering. Speak to a mortgage broker for insight on how, when, and where to seek funding for your real estate project. When handled correctly, the right lender and loan terms can significantly and positively affect your business’s future.
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