Commercial Mortgage FAQ
What is the difference between a commercial mortgage and a residential mortgage?
A residential mortgage only applies to residential property; zoned as a private residence. A commercial mortgage is utilized to secure financing for a larger spectrum of properties. Commercial mortgage is used to finance a building that has 5+ units or that has been zoned as commercial. A residential loan process is standardized by established guidelines, but the commercial loan varies depending on individual lenders.
How much equity do I need to be approved for a commercial mortgage?
It depends on the type of property being financed and the type of loan. Usually, the magical number is 20% minimum equity for a refinance or a 20% downpayment on the property for a purchase. This relates to a loan to value that is no higher than 80%. Bridge loans typically will provide an LTV (loan to value) of 65-70% and will require equity of 30 - 35%.
How long does the loan process take?
It depends upon the type of funding being used. Usually, residential mortgages take about 45 days to close while the more involved conventional commercial mortgage (SBA Loans, etc.) process takes around 60 days from beginning to end. Bridge loans typically require less red tape because they are funded via private lenders. Private lenders create their own terms and can close and fund in as quickly as 2 weeks or less.
What type of information do I need to provide to contribute to a smooth process?
Lenders will typically want to see:
- Three years of individual and business tax returns
- Statements that detail improvements or expenses incurred by the property
- A current rent roll of any apartment building
- Personal financial statements for all partners
- Color pictures (inside and outside) of the subject property
- The balance of the current mortgage (if refinance).
Is the Debt Service Coverage Ratio important in getting approved for a commercial loan?
Yes, debt service coverage is one of the key factors contributing to whether a commercial loan is approved. Also known as DSCR, this ratio shows whether the property is producing enough revenue to cover expenses. Typically, a good DSCR would be 1.20 or greater.
Will I incur a penalty if I pay off the loan before the end of the term?
Most commercial loans do have a "pre-payment penalty." This penalty is incurred if a loan is paid in full prior to the outlined terms. Commercial loans carry a prepayment penalty for four of the first five years. The investor is guaranteed a rate of interest to fund the deal. They are expecting this cash flow for the life of the loan. If the loan is paid off early, the investor loses a portion of their projected income.
Why should I use a Commercial Mortgage Broker?
A Commercial Mortgage Broker specializes in commercial mortgages. They can aid you in navigating the sometimes confusing commercial mortgage market. A broker does not work with one particular lender. They are free to work with several different lenders providing the borrower with several options based upon the need. Broker's have established relationships with several banks and/or private lenders. This network will provide the client with the best rates and terms available in the market; saving the borrower both time and money.
Are there any Upfront fees that I need to pay?
It depends upon the lender and the complexity of the deal. With some lenders, the only fees that the borrower would typically have to pay upfront would be the cost of having the property appraised. All other fees may be paid at closing. The appraisal is important to determine the current value of the property. Other lenders may require an upfront, good-faith deposit which covers due diligence fees and the time involved evaluating and underwriting the deal. We are completely transparent and will inform the client immediately if any upfront fees are required.