Commercial Real Estate Loan Guide | Commercial Lending USA
Find out how to get a loan for commercial real estate.
- To be eligible for a commercial real estate loan, most lenders require that borrowers have a credit score of at least 660.
- Commercial real estate loans may be either term loans, SBA loans, or lines of credit.
- Commercial real estate loans are typically five- to ten-year terms but can be amortized over up to 25. It could leave them with a large balloon repayment at the end.
- This article is written for business owners who require a commercial realty loan to buy a property or renovate an existing one.
Commercial real estate loan is a form of financing used to purchase property for business purposes. You will need to have good credit and a 25% down payment. Then, you can use the majority of the property to finance your business.
What are you looking for in a commercial realty loan?
Although many people think of commercial realty loans as being used to invest in commercial realty, there are more uses. Commercial real estate loans can be used to finance the purchase of or improvements to a property being used by your business. It would help if you used most of the property secured by the loan to your business.
You can lease out a portion of the underlying property but must use at least 51% to support your business. You will need a separate loan if you intend to let 50% or more of the space. It is considered more speculative.
These are a few situations where a commercial real estate loan is appropriate.
- Relocating or expanding retail space in your store
- Buy a warehouse to store your inventory
- You will manage the hotel by buying, building, or renovating it yourself
Choosing a commercial real estate lender
Many lenders and loans are available to you when you need a loan for commercial real estate. You must find the right lender to help you get your desired loan.
These are some things you should consider when choosing a lender
- There are many loan options available
- Origination fees
- Starter interest rates
- Documentation requirements
- Time-in-business requirements
- Prepayment penalties
- Requirements for personal-guarantee
- If you need fast funding or bad credit options (if applicable),
- Ratings and customer complaints from Better Business Bureau
The key takeaway: When choosing a lender, there are many factors to consider. When choosing a lender, you should consider fees, qualifications, user ratings, and rates.
Commercial real estate loan requirements
A commercial real estate loan application is different from a home loan. Lenders want to ensure that your business can repay the loan, as you will use the property to conduct business.
There are three major groups of requirements to secure a loan:
Security
Your lender will need to verify the loan is adequately secured by the property against which it is being approved. To qualify for a loan, you will need at least 25% to 30% equity in your property. If you are buying, you will need a 25% down payment.
Your lender will also want to ensure that you have sufficient property insurance to cover any damage to the property (their collateral). Your lender will check the title and deed for any liens or claims.
Income
Lenders want to verify that your income is sufficient to cover your monthly loan payments. Your debt-service coverage ratio is one metric lender use to make this determination. While the minimum DSCR varies depending on what property you are borrowing against, most lenders prefer a DSCR of 1.25 to 1.25.
You must submit two years’ worth of tax returns to your lender to establish your income. These are usually personal, and business returns. Also, you will need to supply your operating agreement and business documents, personal documentation such as a W-9, and a copy of your passport or birth certificate.
Credit
Your lender will check your credit score if you apply for a loan to purchase the business property. They’ll also check your credit score.
To obtain conventional loans, lenders may require a minimum credit score of 660 to 680.
Lenders will also want to check your credit. They will also need to know the length of your business to determine your credit risk. Commercial loans are usually available to those who have been in business for at most one or two years. It allows the lender to be confident in your company’s ability to generate revenue that will provide the principal loan repayment source.
The key takeaway: Commercial loans for real estate are more expensive and difficult to get than consumer mortgage loans.
What are a consumer and commercial loans?
Individual (consumer) loans and commercial real estate loans are quite different. These loans require different collateralization and underwriting requirements, as well as other rates and terms.
One reason is that commercial loans are easier to securitize than personal loans. Lenders are required to keep many of these loans once they’re issued. On the other hand, investors assume the risk of losing the loan if the borrower defaults.
Lenders are, therefore, more cautious when issuing commercial loans. As well as higher minimum credit scores, down payments are often more expensive. Commercial loans don’t offer mortgage insurance, and income and interest rate requirements are higher.
It is in contrast to home loans which extended for up 30 years. Loan amortizations can be quite long – typically up to 25 years – which leaves borrowers with large balloon payments that they have to repay or refinance after the loan term ends.
The key takeaway: Commercial loan terms are shorter than the amortization period. You will need to refinance your loan or make a balloon repayment.
Commercial real estate loan FAQs
Commercial loans can be more complicated than traditional home loans, and small business owners may need help understanding the details. We have tried to clarify some of the most confusing points for borrowers.
What is the minimum down payment for a commercial realty loan?
A minimum down payment for commercial loans is usually 25% of the property’s purchase price, excluding closing costs. You may have lower down payments – 15% for mezzanine financing and 10% for an SBA loan.
What is the average term of commercial real estate loans?
Commercial real estate loans are typically only good for five to ten years. Loan amortizations can be as long as 25 years. It means the loan payments will be lower than if they were fully paid off within five to ten years. However, it will also mean that borrowers still have a balance to pay.
Can I purchase real estate from an SBA 7(a) loan?
The 7(a) program of the SBA loan is to buy, build, renovate, or expand real estate. These loans, however, are not intended for this purpose. They are not collateralized with real estate. These loans are generally more costly than other loan options, such as SBA 504.
What credit score is required for an SBA loan
A minimum credit score of 680 is required to qualify for an SBA loan. The minimum credit score needed for SBA 504 loans is 680.
SBA loans are not meant to be your first-choice lender. Instead, the Small Business Administration should be considered a lender of last resort. Before applying to the SBA for a loan, you should look at financing options.
The key takeaway: An SBA loan may be available if you are not eligible for a bank term loan. The SBA loan is not a lender of last resort, even though it has a lower down payment requirement.
Author Bio
I am Zoya Arya, and I have been working as Content Writer at Rananjay Exports for past 2 years. My expertise lies in researching and writing both technical and fashion content. I have written multiple articles on Gemstone Jewelry like Opal Ring and other stones over the past years and would love to explore more on the same in future. I hope my work keeps mesmerizing you and helps you in the future.
