Securing a commercial property mortgage can seem like a daunting process, but having the right information and preparation can make it much more manageable. This comprehensive guide outlines key tips and tricks for securing the best possible commercial property mortgage for your needs.
Understanding the Commercial Property Mortgage Process
Before diving into specifics, it’s important to understand exactly what a commercial property mortgage is and the overall process for securing one.
What is a Commercial Property Mortgage?
A commercial property mortgage is simply a loan used to purchase or refinance commercial real estate, such as an office building, retail space, apartment complex, industrial property, or special-purpose property like a hotel, nursing home, or warehouse.
Commercial property mortgages come with larger loan amounts and unique stipulations compared to residential mortgages. They also typically have higher interest rates since they are seen as riskier investments.
The Commercial Property Mortgage Process
The basic process for securing a commercial property mortgage includes:
- Determining financing needs
- Finding a lender
- Getting pre-qualified and submitting a loan application
- Providing requested documents
- Securing an appraisal of the property
- Receiving loan approval and locking in an interest rate
- Completing final underwriting
- Setting a closing date to sign documents and receive funds
This process involves significantly more time and scrutiny compared to residential mortgages. Having a solid understanding of what’s required can help secure a commercial property mortgage more efficiently.
Types of Commercial Property Mortgages
There are several common types of commercial property mortgages, including:
- Conventional commercial mortgages – Standard commercial loans from banks or other lending institutions
- SBA loans – Government-backed small business loans
- Bridge loans – Short-term loans used as temporary financing
- Hard money loans – Asset-based loans from private investors/companies
- Mezzanine financing – A hybrid of debt and equity financing
The type that best fits your needs depends on factors like the property purpose, loan amount, collateral, and more.
Commercial Mortgage Requirements
Like residential mortgages, commercial property mortgages require extensive documentation and stringent qualifications. Typical requirements include:
- Down payment between 10-30%
- Minimum 660 credit score
- Low debt-to-income ratio
- Strong cash reserves
- 3-5 years in business with steady revenue
- Profitable business financials
- Collateral valued well above the loan amount
Meeting as many requirements as possible ensures higher chances for loan approval and better rates/terms.
Tips for Improving Your Chances
With an understanding of commercial property mortgages in place, let’s review key tips and tricks for boosting your success.
1. Improve Your Credit Score
Your credit score directly impacts loan approval likelihood and interest rates, so improving it should be a priority.
- Pull your full credit reports from Equifax, Experian, and TransUnion to understand where you stand. Dispute any errors.
- Pay down balances to decrease your credit utilization ratio. Ideally, it should stay below 30%.
- Make all payments on time to your credit cards and other financing accounts. Payment history is a primary scoring factor.
- Don’t apply for new financing leading up to your commercial property mortgage application since hard inquiries ding your score.
With a 700+ score, you’ll increase approval odds substantially. 750+ scores qualify for the very best rates.
2. Save for a Strong Down Payment
Lenders want to see you have “skin in the game” with a down payment between 10-30% of the purchase price or loan amount.
- 20-30% down is ideal to get approved for the best terms and lowest rates
- Less than 20% will typically require commercial mortgage insurance
- 10-15% is the minimum in most cases
Saving early allows you to make a sizable down payment without relying entirely on financing. Having funds for closing costs is also key.
3. Shop Around Extensively for Lenders
Never settle on the first lender you find when seeking a commercial property mortgage. Extensive shopping is vital to find both:
Loan Options
Different lenders offer varied solutions regarding:
- Down payment requirements
- Interest rates
- Loan terms
- Qualifying metrics
Getting multiple quotes lets you compare your best options.
Lender Compatibility
It’s also crucial to assess each lender’s:
- Industry expertise
- Past deals experience
- Responsiveness
- Communication skills
You’ll work very closely over months/years, so compatibility is vital.
With research through referrals, reviews, associations, and more, you can find lenders well-suited for your particular commercial real estate niche and financing needs.
4. Get Pre-Approved
Before shopping seriously for a commercial property, get pre-approved with multiple lenders first. Pre-approval provides you:
- A better sense of your true price range
- Proof-of-funds to motivate quick sales
- Higher credibility as a buyer
Be ready to submit all required financial statements and property information needed for pre-approval. This helps accelerate the full underwriting process later on.
5. Prepare Required Financial Documents
Speaking of documentation, compiling needed financial records ahead of time can substantially expedite loan processing/approval down the road.
Lenders will request documentation like:
- 3+ years of federal business tax returns
- Federal personal tax returns
- Profit and loss statements
- Rent rolls (for rental/multi-family)
- Bank statements proving cash reserves
- Business formation documents
- Collateral purchase agreements/details
Having organized records close at hand makes providing them to your lender seamless.
6. Hire a Commercial Mortgage Broker
Working with an experienced commercial mortgage broker provides you with a specialized lending advocate. Their expertise and connections can help you:
- Find the most qualified lenders for your scenario
- Better understanding of complex loan options like SBA loans or bridge loans
- Accelerate the pre-qualification, application, and approval processes
- Identify and troubleshoot any issues jeopardizing the approval
They simplify what can otherwise be an arduous mortgage process for commercial property buyers. Best of all, their broker services cost you no extra fees.
7. Explore Alternative Financing Options
If you’re struggling to get approved for traditional commercial bank financing, exploring alternative lending solutions could provide the funds you need such as:
Hard Money Loans
Hard money loans are faster, asset-based, short-term financing options through private lending companies or high-net individuals. Since they focus more on the property value than your finances, they can fund deals banks deny.
Crowdfunding
Crowdfunding platforms like RealtyMogul allow you to source financing from multiple accredited investors rather than a single lending institution. By pooling funds, you can finance projects beyond what typical banks will offer.
Seller Financing
In some deals, sellers may agree to act as the bank and provide financing themselves in exchange for a reasonable interest rate and down payment. This allows them to sell faster while earning ongoing returns.
When seeking alternative commercial financing:
- Thoroughly vet all companies and investors you engage with
- Get promises of financing terms in writing before paying any fees or deposits
- Consult legal counsel to review all financing agreements before signing
With extra diligence, alternative financing can fill gaps left by traditional banking options.
8. Negotiate Terms Aggressively
Banks rarely provide their best offer right out the gate. To get approved for the best possible commercial property mortgage terms:
- Seek competitive quotes from multiple lenders so you can leverage offers against each other
- Present any alternative financing options you secured as negotiation leverage
- Ask for improved terms every step of the way, from pre-approval through final underwriting
- Threaten politely to walk from the deal if your needs aren’t met
Demand the removal of any deal-breaking stipulations that compromise your property’s profit potential or strategic vision going forward. Don’t settle for less than your ideal financing scenario.
9. Close Confidently
As closing day approaches:
- Carefully review the final loan terms again to verify you secured the rates/fees initially promised
- Complete all closing tasks the lender requires per their stipulated deadlines
- Resolve any last issues holding up underwriting like appraisal disputes
- Confirm sufficient funds availability from your down payment/closing cost accounts
- Review final closing disclosures and loan documents with your attorney
Attending closing feeling fully prepared both logistically and legally allows you to sign knowing financing is secured as planned. It’s the final milestone in what’s hopefully been an organized, informed commercial mortgage process.
Final Thoughts
Securing commercial property mortgage financing demands significantly more time, scrutiny, and patience versus typical home loans. But going in understanding key steps like:
- Improving your credit score
- Saving for a strong down payment
- Thoroughly shopping lenders
- Getting pre-approved
- Preparing needed documents
- Hiring a mortgage broker
- Exploring alternative financing routes
- Aggressively negotiating terms
Can make the process feel much more manageable and set you up for success.
The bottom line is securing commercial real estate loans requires patience, persistence, and an eye for detail. But taking a strategic, informed approach allows you to access the capital you need to purchase revenue-driving properties at favorable rates.
Having the right property mortgage terms in place makes it infinitely easier to operate and grow your business long-term. With the right property and the right financing, your commercial venture can thrive for decades to come.
Key Takeaways:
- Understand the general process and your options before starting your search
- Improving your credit score and down payment should be top priorities
- Take time to thoroughly shop around for loan options and compatible lenders
- Lean on mortgage brokers and attorneys whenever needed as valued partners
- Getting pre-approved first allows you to search for properties strategically
- Don’t be afraid to pursue alternative financing if banks deny your application
- Negotiate aggressively at every step to maximize leverage
- Stay diligent through closing to guarantee favorable loan terms
With the right preparation and persistence, securing financing is very attainable even for first-time commercial buyers and borrowers. Follow these tips and work closely with commercial finance experts to give yourself the best shot at mortgage approval with the ideal rates and terms your business needs to prosper.
