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How Your Credit Report Affects the Cost of a Commercial Real Estate Loan
Author David Schneider | Nov 16,2007
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Commercial real estate lenders consider many things when determining the specific loan terms that are approved for each loan applicant. One of the most important factors is your credit report. The health of your current credit report can dramatically affect the interest rate associated with your commercial real estate loan, and may even affect your ability to gain loan approval.
Why Your Credit Report Matters
When analyzing your commercial loan application, lenders attempt to estimate how big of a risk you are. This is because lenders considered a loan as an investment. They expect to make a profit through loaning you money, and they can't do that if you default on your loan.
Historically it has been shown that commercial loan borrowers with lower credit scores are more likely to default on their loan. This makes sense, as a credit score is directly impacted by how well or poorly you handled past debts. Depending on your credit report and the amount of risk you are perceived to carry, commercial lenders may refuse loan approval or attach a higher interest rate to help cover their losses in the event you fail to pay off the loan.
Obtaining Your Credit Report
Before commercial real estate lenders start reviewing your credit report, it's a good idea to look at it yourself. This will help prepare you for what type of loan offers you can expect to receive. There are varieties of ways you can obtain your credit report, but one of the easiest and safest ways is to visit the official website of one of America's three major credit reporting agencies: Experian, Equifax and TransUnion. All three of these organizations are highly reliable and allow you to view your credit history through a secure website.
How Commercial Lenders Assess Your Credit Report
Within your credit report is a credit score, which is calculated based on numerous factors, including the number of credit accounts you have, your payment history, the amounts you owe on each account and the length of your credit history. Credit scores range from 300 up to 850, and the higher your credit score is, the better. The average credit score for Americans is about 678.
Commercial real estate loan applicants with a credit score over 620 can typically expect to gain approval for a loan at the best interest rates currently available. If your credit score sits between 620 and 540, then you will probably still be able to acquire a standard commercial loan, but it will likely carry a higher interest rate. Credit scores below 540 are considered high-risk for lenders, meaning you may have trouble gaining approval for a commercial loan.
Options for Poor Credit Commercial Real Estate Loan Borrowers
If you find that you are unable to gain approval for a commercial real estate loan, then there are a few options available to you. If you can, you might want to hold off on acquiring your loan until your credit report improves. By paying off current debts and making payments on time, your credit score will eventually improve. However, it could take several years to repair your credit report to a respectable score, so this option may not be available to you.
If you need your commercial loan now, then you might consider asking a business partner or family member to co-sign on the loan for you. This allows you to gain loan approval based on the other person's score instead of yours. However, it also places financial responsibility on your co-signer, meaning that their credit score and assets will also be negatively impacted should you default on the loan.
The last option open to poor credit borrowers is to seek out a sub-prime loan. Sub-prime lenders cater to high-risk candidates by relaxing their guidelines for approval. However, to cover these higher risks, you can expect to pay a higher interest rate. Commercial real estate lenders consider many things when determining the specific loan terms that are approved for each loan applicant. One of the most important factors is your credit report. The health of your current credit report can dramatically affect the interest rate associated with your commercial real estate loan, and may even affect your ability to gain loan approval.
Why Your Credit Report Matters
When analyzing your commercial loan application, lenders attempt to estimate how big of a risk you are. This is because lenders considered a loan as an investment. They expect to make a profit through loaning you money, and they can't do that if you default on your loan.
Historically it has been shown that commercial loan borrowers with lower credit scores are more likely to default on their loan. This makes sense, as a credit score is directly impacted by how well or poorly you handled past debts. Depending on your credit report and the amount of risk you are perceived to carry, commercial lenders may refuse loan approval or attach a higher interest rate to help cover their losses in the event you fail to pay off the loan.
Obtaining Your Credit Report
Before commercial real estate lenders start reviewing your credit report, it's a good idea to look at it yourself. This will help prepare you for what type of loan offers you can expect to receive. There are varieties of ways you can obtain your credit report, but one of the easiest and safest ways is to visit the official website of one of America's three major credit reporting agencies: Experian, Equifax and TransUnion. All three of these organizations are highly reliable and allow you to view your credit history through a secure website.
How Commercial Lenders Assess Your Credit Report
Within your credit report is a credit score, which is calculated based on numerous factors, including the number of credit accounts you have, your payment history, the amounts you owe on each account and the length of your credit history. Credit scores range from 300 up to 850, and the higher your credit score is, the better. The average credit score for Americans is about 678.
Commercial real estate loan applicants with a credit score over 620 can typically expect to gain approval for a loan at the best interest rates currently available. If your credit score sits between 620 and 540, then you will probably still be able to acquire a standard commercial loan, but it will likely carry a higher interest rate. Credit scores below 540 are considered high-risk for lenders, meaning you may have trouble gaining approval for a commercial loan.
Options for Poor Credit Commercial Real Estate Loan Borrowers
If you find that you are unable to gain approval for a commercial real estate loan, then there are a few options available to you. If you can, you might want to hold off on acquiring your loan until your credit report improves. By paying off current debts and making payments on time, your credit score will eventually improve. However, it could take several years to repair your credit report to a respectable score, so this option may not be available to you.
If you need your commercial loan now, then you might consider asking a business partner or family member to co-sign on the loan for you. This allows you to gain loan approval based on the other person's score instead of yours. However, it also places financial responsibility on your co-signer, meaning that their credit score and assets will also be negatively impacted should you default on the loan.
The last option open to poor credit borrowers is to seek out a sub-prime loan. Sub-prime lenders cater to high-risk candidates by relaxing their guidelines for approval. However, to cover these higher risks, you can expect to pay a higher interest rate. |
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