A Guide to Commercial Real Estate Loans
Business entities obtain commercial real estate loans to purchase properties that will make a profit.
How Are Commercial Property Loans Different From Other Loans?
These loans have different requirements, rates, and terms than consumer loans. Banks assume a high risk when issuing these types of loans.
What is the Minimum Down Payment?
A down payment is commonly 25% of the purchase price. However, it can be lower with the use of specific financing methods. There are also ways to get a loan with no money down by utilizing other resources:
- An investing partner can provide the funds required for loan qualification.
- A seller might offer a loan directly to the borrower to purchase the property. This option can benefit both parties.
- A borrower may also use a short-term lending option, called a hard money loan. Investors use this type of loan to renovate or develop a property and then sell it for a profit. Private lenders issue hard money loans, so the financing is not determined by creditworthiness, but rather the value of the property itself.
A borrower should note that it will be harder to qualify for a loan without a down payment.
What Is the Interest Rate?
Financial institutions typically calculate interest rates for real estate loans using a loan-to-value ratio based on an appraisal of the property. The interest rates vary significantly based on the type of loan chosen by the borrower. Loans backed by the Small Business Association usually have the lowest interest rates.
What Is the Credit Score Needed?
A good credit score is necessary to take advantage of a commercial real estate purchase loan. Additionally, financial institutions use the property as collateral and closely examine the real estate’s potential income. Lenders will also likely require a personal guarantee. Minimum credit scores accepted are typically between 660 and 680.
How Long Does it Take?
The loan process typically takes 45-120 days. Although some circumstances will speed it up, a real estate investor should plan a realistic time frame to fund a purchase.
What Are the Basic Requirements?
- A borrower must have a business entity set up.
- It is vital to have organized paperwork.
- The business credit history should be free of foreclosures, recent tax liens, or bankruptcies.
What Is the Prepayment Penalty?
There may be a prepayment penalty fee, as early payment often results in a yield loss for the lender.
Commercial real estate loans give property owners an avenue to further their business endeavors and investments.