Commercial Mortgage Lenders | Commercial Mortgage Lenders Advice + Tips

Commercial Mortgage Lenders

If you're about to buy a commercial property, it's going to be a bit different than what happens when you buy your home, although you'll still be getting a mortgage.

Commercial mortgage lenders specialize in setting up these types of loans. When you meet with commercial mortgage lenders, they're going to be quite stringent with you.

That's because unlike personal mortgages such as those you get for your home, the federal government does not back them.

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Home mortgages, by contrast, are backed by entities like Fannie Mae. They'll also be charging you higher interest.

There are also some questions you are going to have to ask yourself before you borrow; you need to be very responsible if you do decide to take out a commercial mortgage.

This will prepare you much better when you go into meet with your prospective commercial lender, and therefore will make it much more likely that you will actually qualify for a commercial mortgage.

How much can you afford?

This is probably the most important question you're going to ask yourself, since you'll need to be able to prove that you can make the payments.

Don't borrow more than you can afford, or you're not likely to get approved for your commercial mortgage. Commercial mortgage lenders will need a prove.

Find out if there's a balloon payment

Most commercial mortgages include a balloon payment. This will generally be due in between three to 10 years. He may also have to refinance your home before the balloon date, which will incur more costs, like closing costs, or extra monies toward higher interest rates if they've gone up in the interim.

Remember, too, that depending on your business climate, you may not actually qualify for a renewal. A better bet is to try to find a mortgage without a balloon payment, if at all possible.

Will you need to be prequalified for financing?

Especially if you're going to need to be prequalified for financing, and if you want to close quickly, make sure you and your lender are on the same page as to when these things will happen.

It's likely that your lender is going to want to review your income statements and other documentation before your loan application is approved. This can take several weeks.

Are there minimum assets or deposits you will have to maintain?

Banks especially may request that if you take out a commercial mortgage with them, you'll also need to hold a minimum level of deposit at the bank in order to qualify. If you are going through a bank for your commercial mortgage, find out if this is something you'll need to do, too, in order to qualify.

What documentation will you need?

Make sure you ask before you meet with your commercial mortgage lender what documents you'll need to bring with you. Things like tax returns, operating statements, lease copies, statements of assets, and other financial documents are likely going to be necessary, so make sure you have these things on hand.

Will any financial reporting be required?

Commercial mortgages often entail more than simply making a monthly payment, like residential mortgages do. Instead, you'll often be required by the lender to provide operating statements and other financial reports on a semiannual or even quarterly basis on the business and property for as long as you have the mortgage. Make sure you know what your obligations will be before you sign.

Will there be prepayment penalties?

Commercial mortgages usually do have prepayment penalties if you pay your mortgage off early. Ask if this will happen, and try to find a commercial mortgage lenders who will give you a commercial mortgage without prepayment penalties.

Is the commercial mortgage assumable?

Especially if you think you're going to be selling the property before the mortgage is paid off, make sure you ask your lender if the loan will be assumable by the person who buys your property.

If the loan is assumable, it means the buyer can simply take over the mortgage terms and assume the loan payments instead of having to apply for an entirely new mortgage. By the way, this is also usually a good selling point if you do intend to sell your property before the loan is paid off.

Make sure you have a full accounting of total costs

Ask about all the costs that you are going to be responsible for when you sign on for your commercial mortgage, including a property survey, lender points and fees, legal fees as necessary, and environmental reports.

Some commercial mortgage lenders will take care of these costs themselves instead of passing them on to you, or they may have less expensive options.

Commercial Second Mortgage

Buying property whether commercial or residential is always a big decision that requires careful consideration and calculation. A mortgage is a long term investment that will require you to continue making payments for several years.

You will usually look at the value of the property and confirm whether it is worth taking the risk. For a commercial mortgage in particular, you may want to see whether the income you receive from the property whether it is in the form of rent from a tenant or it is in the form of the profits you make from a business you set up in the property.

But checking the feasibility of the property for you is just one part of the transaction. You still have to convince your financier that you have what it takes to service the instalments for the property.

With this sometimes arduous process in mind, this is why taking up a commercial second mortgage should be well thought out process. The commercial second mortgage is taken against the equity on the property.

In the event of foreclosure, it is considered of lower priority to the main mortgage on the property. The tenure is also shorter averaging 5 years or less but their interest rate is also higher to cater for the added risk that comes with them playing second fiddle to the first mortgage if recovery is required.

One thing you must do when taking up a commercial second mortgage is to check the terms in detail. Consider not just the interest on the mortgage and value of instalments but also other costs such as processing fees, legal costs, valuation fees and costs for early repayment.

You have to assess all this to ensure that you have a clear understanding of the amount of cash you will have available after all fees are deducted.

Otherwise, you could end up taking a small second mortgage only to later find out that the cost of accessing the mortgage reduces the amount of money that is eventually available to you to the extent that you will be unable to do what you were hoping to achieve.

You do not have to take the commercial second mortgage from the same financial institution. Of course there are advantages to doing so as you might be able to experience considerable savings in the processing costs.

But going to another institution can be considered when they offer a lower interest rate for instance or provide for a longer tenure that better meets your requirements. Make sure that you read the finer details to make sure that you compare apples and apples when comparing the product as offered by any two institutions.

Do not stake your expectations too high as far as interest rate charged goes. Many financiers will peg the commercial second mortgage rate to about 2-3% over the rate on the main mortgage.

At its core, a commercial second mortgage is not that different from the main mortgage. You (the borrower) apply for the loan which will be approved based on an assessment of your present personal credit worthiness.

Once approved, the loan is underwritten, the proceeds are availed to you and details of the second mortgage are recorded on the title documents at the registry of deeds office.

If you are applying for the second mortgage as a business as opposed to as an individual, then the credit worthiness of the business as well as that of the directors of the company.

You will be expected to provide a lot more documentation that relates to the business including the most current audited financial reports, a summary of short and medium business plans, asset values and assessment of the target market that your business serves.

Your application will need to be signed by designated directors from your company and may even need a board resolution that attests to the company's board members agreeing to take up the second mortgage.

You can use the commercial second mortgage to expand your business and initiate projects that demand immediate and substantial capital.

A second mortgage can be a great way to catapult your business to the next level. But as soon as you project kicks off and you are able to make more than enough return you aim to pay off your second mortgage as soon as you can so that you can avoid paying the entire interest that you would have had to pay if you continued for the duration of the entire loan.

Actually, if you make even better return there would be not problem in repaying your original mortgage.

Commercial Mortgage

A mortgage is a credit product where financing is extended to a client with real estate as the security. A commercial mortgage is a mortgage that is usually obtained by a business with property as collateral.

Strictly speaking, a commercial mortgage is not that different from a residential mortgage.

There are a number of differences between residential and commercial mortgage but the most basic one is that the commercial mortgage is secured against commercial property while a residential mortgage is secure against residential property.

There is no restriction as to the type of business that can take up a commercial mortgage. It can range from a partnership, an incorporated business or a limited liability company.

Based on the nature of the applicant and the relatively higher value that defines commercial mortgages when compared to residential mortgages, the application process is more rigorous.

The process of determining the credit worthiness of a business is not as straightforward as that of a individual where an assessment of income and credit history may be all that is needed to close a mortgage deal. For the business, a good amount of paperwork is required.

An assessment of the business ability to repay the loan based on its cash flow must be done. A history of timely repayment of past loans for both the business and the directors is also vital.

The terms and conditions on commercial mortgages vary. One particular type of commercial mortgage worth mentioning is the non recourse mortgage agreement. For the non recourse mortgage, if the borrower defaults on repayment, the creditor is permitted to seize the property and use it to recover the outstanding loan.

But this is as far as it goes. In a non recourse mortgage, if after selling the property held as security the creditor is still not able to realize the entire amount that will still outstanding, they cannot go for any other asset owned by the borrower. In other words, the borrower is released from any obligation to make further payment for the pending amount.

Also a number of commercial mortgages come with a clause that authorize the lender to take over the property regardless of whether the borrower has already filed for bankruptcy or not. One reason why borrowers would want this type of clause inserted is when the mortgage itself serves as an underlying asset for a derivative product or a real estate bond.

The lender will want to prevent the loss of the property through bankruptcy filing. Losing the property will not preclude them from meeting their own obligations leading to a loss in their books.

Another key characteristic of commercial mortgages especially in the US is the balloon payment principle. When the bank advances the loan to the borrower, the repayments are usually calculated based on a loan tenure of 20 to 30 years.

However, the bank will require that the business pay up the remaining loan balance after a certain period of making the regular installments. This time period could be anything from a number of days, months or years.

Thus, during the process of application and subsequent approval of the commercial mortgage, the terms are clearly defined to indicate after what period the balloon payment is due.

For instance, the terms can state that it is a mortgage with a 25 year repayment plan but with an 8 year balloon-this would mean that the borrower will make repayments for 8 years based on a 25 year amortization plan and then make a lump sum payment on the 9th year that will clear the outstanding balance.

This type of staggered structure but with a huge repayment at some point in the middle of the normal tenure of the loan is particularly tailored for businesses.

Instead of tying the repayment to an 8 year plan which would mean much higher monthly installments, the longer tenure is used to avail cash to be used by and for the business to generate enough cash to pay back the loan and make a profit. At the worst case, the borrower may opt to sell the property and pay back the pending loan.

The reasons for obtaining commercial mortgages are as varied as the businesses that apply for them. The mortgage may be to simply buy the property. But if the business already owns the property, the commercial mortgage will only be to make available a large sum of cash for other purposes such as property acquisition, expansion of existing business premises or even refinancing existing debts.

Getting a Commercial Mortgage

You might think you know a lot about getting a commercial mortgage, in that you may think it's a lot like getting a personal mortgage such as the one you get when you buy your home.

However, the processes are quite different, and standards are pretty stringent -- more stringent than they are for homebuyers -- if you're in the market for a commercial mortgage.

What can you expect during the process?

Commercial mortgage lenders are going to be very careful in scrutinizing your finances, and their standards are going to be quite a bit higher. That's because unlike home mortgages, commercial mortgages aren't backed by the federal government. One of the things you'll notice is that you'll be paying a higher interest rate on your commercial mortgage than you do on your home mortgage.

Before you decide to take out a commercial mortgage

Before you decide to take a commercial mortgage, make sure you can actually do so. In addition, be prepared when you meet with your lender; being prepared is going to make you both look good to the lender and will make it much more likely that you'll actually know whether or not you qualify before you even go in.

Figure out how much you can afford

Don't just go in unprepared and blindly let your commercial lender determine this for you. You're going to show that you're very responsible if you know how much you can borrow upfront based upon figures you provide. If you do your homework ahead of time, you'll be able to prove that you can make the necessary mortgage payments on a monthly basis, and you'll also know what you'll be paying at least as a rough estimate before the lender approves you.

Prepare for financing prequalification

Chances are, you will need to be prequalified to get financing. You won't be able to close before you do this, so make sure you and your lender are communicating properly. Your lender is going to want to take a careful look at your documentation and income statements before your loan is approved, which can take at least a couple of weeks. Therefore, make sure you know when everything is going to happen so that you can arrange closing dates, etc., accordingly.

Documentation and financial reporting

It's likely that you already know you'll need documentation to qualify for a commercial mortgage. Operating statements, tax returns, asset statements, and other financial documents are usually asked for by lenders so that they can determine you are financially solvent enough to qualify for a commercial loan.

You probably are not surprised by that, since these or similar things are also often required when you apply for a home mortgage, to determine your financial solvency and capability. However, although applying for a home mortgage does require some initial documentation and qualification assessment, getting a commercial mortgage also usually requires that you do some sort of "maintenance" reporting to your lender over the life of the loan. For example, the lender may ask you to provide financial reports and/or operating statements quarterly, or at least semiannually. Before you sign on the dotted line, know what your lender expects of you in terms of recurring documentation and financial reporting.

What about balloon payments?

Most commercial mortgages will require that you make a balloon payment. This payment is going to be due anywhere from three to 10 years after you take out a mortgage. If you have to refinance your commercial mortgage before the due date of the balloon payment, this is going to result in more costs for you. It's almost always better to try to find a mortgage without a balloon payment, if at all possible.

What about prepayment penalties?

Let's say that you are a very responsible commercial mortgage holder, and you want to pay your mortgage off early. Unfortunately, most commercial mortgage lenders will penalize you for doing so. Therefore, when you meet with your prospective lender, see if you can get a commercial mortgage that doesn't have prepayment penalties. That way, you're free to pay off the loan as soon as you are able to without incurring extra costs.

Is it likely that you may sell the property before the loan is actually paid off?

Especially if it's likely you're going to sell the property before your commercial mortgage is paid off, ask if the mortgage is "assumable," meaning that the person who buys the property can simply take over your mortgage. If it is, this will mean many fewer headaches for you when the time comes to sell, and many fewer headaches for your buyer, too.

Make sure you know what it's going to cost you in total

Before you sign on for one, make sure you know all of the costs you are going to be responsible for when it comes to your commercial mortgage. In other words, besides your mortgage payment, you may be responsible for lender fees and points, legal fees, environmental reports, property surveys, and more. In many cases, lenders will assume many or even all of these costs (other than the commercial mortgage itself), but some do not. Therefore, make sure you know whether or not you'll be responsible for these extra costs before you take on your commercial mortgage.