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What to Expect when Applying for a Commercial Mortgage Loan
Author David Schneider | Dec 03,2007
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Commercial mortgage loans are completely different from residential mortgage loans. The process of obtaining a commercial loan has more steps involved in the mortgage process than a residential mortgage loan process. Commercial loans are not typically backed by a governmental agency like Fannie Mae or the VA. This means that many commercial lenders are averse to risk, which translates into higher interest rates for commercial loans than for residential ones. This also means that the lender requires business information on top of the personal information of the borrowers. So, you need to have a different mindset when entering into a commercial loan versus a loan on a residence.
Repayment Terms for a Commercial Mortgage Loan
While residential mortgage loans may extend as far as a 30-year period, commercial loans have a much shorter repayment period associated with them. Most commercial mortgage loans have a balloon payment, which means that after a specified period of time (usually five or seven years), the lender requires the borrower to pay the balance due in full. Since most borrowers do not have the funds to pay a large balance off in a lump sum, many choose to refinance the commercial mortgage before or at the time that the mortgage balloons.
Non-bank lenders generally offer less stringent credit requirements for commercial loans. Some non-bank lenders will make long-term commercial loans without requiring the early balloon repayment. These loans, which may carry a slightly higher interest rate, work like a typical home loan. They allow a steady repayment over 20 or 30 years. It is often worth paying a one- or two-point higher interest rate for a fixed-term loan in order to ensure the security of a long-term loan commitment.
Process Time to Get a Commercial Loan
The length of time it takes to get a commercial loan depends on the lender that is processing the loan. Since banks have stringent guidelines, impose the most loan covenants and take the longest time to secure the loan, the process with a bank is going to take longer than it may take with alternative types of lenders.
Commercial mortgage loans applied for with a bank goes through several phases of review, starting with historical income statements, balance sheets and statements of cash flow for the business. After a review of the business documentation, banks require a copy of the last five years of personal tax returns for each of the borrowers and/or owners, who will personally guarantee the loan.
Provided that the lender receives all of the information in a timely manner, it takes several weeks for the borrower to receive a verbal or written commitment letter from the bank. This letter does not guarantee the closing of the loan because the loan committee of the bank still has the right to deny the loan. If this happens, the business will have to start the commercial mortgage loan process all over again with a different lender.
Documentation Required for a Commercial Loan
Most banks and other traditional commercial lenders require three to five years of financial statements, income tax returns and any other documentation required by the lender like:
• Leases
• Asset statements
• Original corporate documents
• Personal financial records of the business owners
Costs Associated with a Commercial Loan
The first “cost” that needs to be considered on a commercial mortgage loan is the interest rate. Since the interest rate does not include the closing costs and fees that are associated with obtaining the mortgage, the annual percentage rate (APR) is the best reflection of the true cost of the mortgage. The stated interest rate is often artificially low when one considers all the costs of a loan. How many points you choose to pay will also need to be considered when figuring your total costs for the loan.
Other costs may include:
• Legal fees,
• Surveys
• Loan application fees
• Appraisal charges
• Line items charged
• Pre-paids (interest and insurance)
Depending on the amount of the loan, commercial mortgage closing costs and fees can be tens of thousands of dollars. This is something that you will need to be mindful of because some of these costs are required upfront and cannot be rolled into the loan amount.
Commercial mortgage loans are completely different from residential mortgage loans. The process of obtaining a commercial loan has more steps involved in the mortgage process than a residential mortgage loan process. Commercial loans are not typically backed by a governmental agency like Fannie Mae or the VA. This means that many commercial lenders are averse to risk, which translates into higher interest rates for commercial loans than for residential ones. This also means that the lender requires business information on top of the personal information of the borrowers. So, you need to have a different mindset when entering into a commercial loan versus a loan on a residence.
Repayment Terms for a Commercial Mortgage Loan
While residential mortgage loans may extend as far as a 30-year period, commercial loans have a much shorter repayment period associated with them. Most commercial mortgage loans have a balloon payment, which means that after a specified period of time (usually five or seven years), the lender requires the borrower to pay the balance due in full. Since most borrowers do not have the funds to pay a large balance off in a lump sum, many choose to refinance the commercial mortgage before or at the time that the mortgage balloons.
Non-bank lenders generally offer less stringent credit requirements for commercial loans. Some non-bank lenders will make long-term commercial loans without requiring the early balloon repayment. These loans, which may carry a slightly higher interest rate, work like a typical home loan. They allow a steady repayment over 20 or 30 years. It is often worth paying a one- or two-point higher interest rate for a fixed-term loan in order to ensure the security of a long-term loan commitment.
Process Time to Get a Commercial Loan
The length of time it takes to get a commercial loan depends on the lender that is processing the loan. Since banks have stringent guidelines, impose the most loan covenants and take the longest time to secure the loan, the process with a bank is going to take longer than it may take with alternative types of lenders.
Commercial mortgage loans applied for with a bank goes through several phases of review, starting with historical income statements, balance sheets and statements of cash flow for the business. After a review of the business documentation, banks require a copy of the last five years of personal tax returns for each of the borrowers and/or owners, who will personally guarantee the loan.
Provided that the lender receives all of the information in a timely manner, it takes several weeks for the borrower to receive a verbal or written commitment letter from the bank. This letter does not guarantee the closing of the loan because the loan committee of the bank still has the right to deny the loan. If this happens, the business will have to start the commercial mortgage loan process all over again with a different lender.
Documentation Required for a Commercial Loan
Most banks and other traditional commercial lenders require three to five years of financial statements, income tax returns and any other documentation required by the lender like:
• Leases
• Asset statements
• Original corporate documents
• Personal financial records of the business owners
Costs Associated with a Commercial Loan
The first “cost” that needs to be considered on a commercial mortgage loan is the interest rate. Since the interest rate does not include the closing costs and fees that are associated with obtaining the mortgage, the annual percentage rate (APR) is the best reflection of the true cost of the mortgage. The stated interest rate is often artificially low when one considers all the costs of a loan. How many points you choose to pay will also need to be considered when figuring your total costs for the loan.
Other costs may include:
• Legal fees,
• Surveys
• Loan application fees
• Appraisal charges
• Line items charged
• Pre-paids (interest and insurance)
Depending on the amount of the loan, commercial mortgage closing costs and fees can be tens of thousands of dollars. This is something that you will need to be mindful of because some of these costs are required upfront and cannot be rolled into the loan amount. |
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