What is a Commercial Loan?
If you’ve never borrowed money for your business, you may be in for a surprise. Whether you want to borrow working capital to expand your business or leverage equity in a commercial real estate venture, you will soon find the commercial loan process is very different from the more-common home mortgage process. Commercial loans, unlike the vast majority of residential mortgages, are ultimately backed by a governmental entity such as Fannie Mae. Consequently, most commercial lenders are risk-averse; they charge higher interest rates.
What do I Need to Qualify?
Credit Scores– One of the main differences between a residential and commercial loan is the amount of weight the credit score holds. It’s always better to have a good credit score. For residential mortgages, a lot hinges on your credit scores only, and of course income. But with commercial real estate loans, credit score is not the top consideration.
Net Worth– When applying for a commercial loan, one of the first things a lender will look at is the business’s net worth. Your net worth is the difference between your assets and your liabilities.
However, a net worth equal to or greater than the loan isn’t always the rule. For the example above, you could have a net worth of $600,000 or $800,000, but you need to make up for it with something else. For example, if you have a high income, then net worth isn’t as important.
Liquidity– Liquidity is also a significant factor. For a $1,250,000 loan, if covering the $250,000 down payment exhausts all your liquid cash, the lenders will look upon that as a little weary because you have no cash left. They don’t like to see someone use all their cash after a closing and then not have anything for an emergency, such as a $10,000 to $20,000 deductible for an insurance claim.
The liquidity requirement varies from lender to lender. The general rule is 10% to 20% of the loan amount. If you want to borrow a million dollars, you have to have at least $100,000 after closing; $150,000 or $200,000 is even better. Other times lenders may require 6 to 12 months’ worth of principal and interest payment. If the monthly payment is $10,000, for example, a lender may want to see $120,000 in liquidity.
Ownership & Management– The lender will also want to know about your ownership experience. Owning a duplex or three or four single-family rentals, or maybe 10 or 12 (you could even have 30 of them) – that’s even better if you have a large portfolio of single-family rentals. But if you’ve only had one or two, and maybe a couple of duplexes, that’s not the same as a multifamily because it’s a little bit different animal.
If you are purchasing anywhere between 5 and up to maybe 50 units, the lender will pretty much allow you to self-manage the property because there’s not a lot of third-party management of that size; it’s just too small, and they don’t make enough money on it. Therefore, since you will be self-managing, the lender will want you to have previous management experience. Do you know about leasing? Do you know how to perform credit checks, verify employment, and run a background check?
If you aren’t managing the property yourself, however, ownership experience will be more important than management experience.
Income– Finally, the last area a lender will be asking about is your income, whether you’re self-employed or a W2 employee. If you already own a portfolio of properties, they will want to look at your global cash flow, which is how much cash you earn after debt service. If you experience a hardship on one property, the lender wants to make sure you can move cash around to keep all your debt service intact.
There’s no ratio on [global cash flow]. We typically don’t use your debt-to-income ratio, in commercial real estate. We look at the property’s loan-to-value, and debt coverage ratio, meaning how much does the net operating income exceed the monthly principle and interest payment.
The Fintech Mortgage Association Experience
At Fintech Mortgage Association you can expect transparency and open communication, a knowledgeable team of industry experts and a customer-centric team working together to make your home buying experience effortless and exciting. We are fast and efficient, closing most of our purchase loans in 30 days or less.
Fintech Mortgage Association will offer the right loan tailored to you (VA, FHA, Conv, Jumbo and much more). Contact us for more information on your mortgage loan needs.
Any questions? Our Loan Officers would love to answer any of your questions on our conventional loans and get you pre-qualified today! Try our 1 minute Quick Qualify App. Discover Your Score HERE