Your Commercial Real Estate Loan Guide

Your Commercial Real Estate Loan Guide
Written by Publishing Team

  • Most lenders require borrowers to have a credit score above 660 to qualify for a commercial mortgage.
  • Commercial real estate loans can be term loans, SBA loans, lines of credit, or portfolio loans.
  • Commercial real estate loans usually have a term of five to 10 years but are amortized over up to 25 years, which can leave them with a large down payment at the end of the term.
  • This article is for business owners who need a commercial real estate loan to purchase a building or remodel an existing property for their business.

A commercial real estate loan is a type of financing used to purchase real estate for commercial purposes. To get a business loan, you will need to have good credit, make a down payment of 25% or more and plan to use the majority of the property being financed for your own business.

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What will you need to get a commercial real estate loan?

While most people associate commercial real estate loans with investing in commercial real estate, the uses of these loans are actually more specific than that. Commercial real estate loans are designed to finance the purchase or improvement of property that is being used for your own business. To get a business loan, you need to use the majority of the property to secure the loan for your own business purposes.

This means that you can still rent out a portion of the underlying property, but at least 51% of the property must be used for your business. On the other hand, if you plan to rent 50% or more of the space, you need a separate type of loan, as this is a more speculative activity.

Here are some of the situations in which a commercial real estate loan may be appropriate:

  • Buying an office building to house your business
  • Expand or move your retail space to your store
  • Buy a warehouse to house your inventory
  • Buy, build or renovate a hotel that you will run yourself

Commercial Mortgage Loan Rates, Terms and Fees

Interest rate Starts at about 3.5%
push down at least 25%
loan terms Five to 10 years, with an amortization of up to 25 years
debt-to-income requirements Minimum Debt Service Coverage Ratio (DSCR) 1.25
Minimum credit score 660
Eligible property types Office, retail, industrial, hotel, restaurant, medical, recreational and specialty properties

Main takeaway: Commercial real estate loans are for business owners who buy, build or renovate a building to house or expand their own business.

Types of commercial real estate loans

There are several types of loans that can be used to finance commercial real estate. Each option has its own pricing, conditions, eligibility requirements, and application process. Therefore, before applying, decide what type of loan is right for you. Here are some options to consider:

loan type Who is good?
Term bank loan Borrowers with well-established banking relationships
SBA loan Business owners who have already tried to get a loan from a traditional bank
line of credit People who already own their property and want to borrow against their equity
wallet loan multi-site companies

Within the SBA loan category, there are many loan products that can be used to purchase, build, or renovate commercial real estate. However, the SBA 504 loan program is specifically designed for this purpose. Funds provided through the 7(a) program can technically be used to purchase or improve real estate, but the program is not ideal for real estate financing.

Also, in the field of portfolio loans, it is important to note that these loans are often used by landlords who own a number of properties that they rent to tenants. Lenders consider this a more speculative activity, with different rates, terms and eligibility criteria. If you have a business that owns several facilities that you use for your own purposes, make this clear before you explore portfolio loan options with a lender.

Main takeaway: There are many types of loans that can be used to purchase commercial real estate, such as bank term loans, SBA loans, and lines of credit and portfolio loans.

Choosing a commercial real estate lender

When you are trying to get a commercial real estate loan, there are many different loans and lenders to choose from, so it is important to find a lender that not only offers the type of loan you want but also has rates that you can afford and the qualifications and requirements you can meet.

Here are some things to consider when choosing a lender:

  • Available loan options
  • Incorporation fee
  • Starting interest rates
  • Documentation requirements
  • Time requirements at work
  • Prepaid fines
  • Personal warranty requirements
  • Quick financing or bad credit options (if you need them)
  • Better Business Bureau Reviews and Customer Complaints

Main takeaway: There are many factors to consider when choosing a lender. In addition to the type of loan you need, you should check rates, fees, qualification requirements, and user ratings.

Commercial Mortgage Loan Requirements

Qualifying for a commercial real estate loan is very different from getting a home loan. Since you’ll be using the property for business purposes — and paying off the loan with business income — lenders want to make sure your business can cover the loan payments.

The requirements for obtaining a loan fall into three main groups:

1. Security

Before the loan is approved, the lender will want to know that the loan is properly secured by the property you are borrowing against. This means that you will generally need to own at least 25% to 30% of the equity; If you are buying, you will need a down payment of 25% or more to qualify.

In addition, the lender will want to make sure that you have adequate property insurance to protect against property damage (their guarantees). The lender will also run the title business on the property and check the title deed to make sure there are no outstanding liens or other claims against the property. [Read related article: What Is a Lien?]

2. Income

When processing your application, lenders want to know that you have a lot more income compared to your expenses so they can be confident that you can make your loan payments each month. One metric that lenders use when making this decision is the debt service coverage ratio (DSCR). The minimum DSCR varies based on the property you’re borrowing against, but most lenders want to see a DSCR of 1.25 or higher. [Read related article: 8 Factors That Keep You From Getting a Small Business Loan]

To determine your income with your lender, you will need to file tax returns for two years – usually business as well as personal, because you will be borrowing money for business purposes but you will also need to sign a personal guarantee. You will also need to provide documents of your business organization and operating agreement, as well as personal documents, such as a W-9 and a copy of your birth certificate or passport.

3. Credit

If you are taking out a loan for business property, the lender will likely want to check your business credit score. However, in most cases, lenders will also want you to provide a personal guarantee, so they will want to check your personal balance as well.

Minimum credit scores vary by lender but are typically between 660 and 680 for most conventional loans.

In addition to checking your credit, lenders will want to know how long you’ve been in business, to assess your credit risk. To qualify for a business loan, you usually have to have been in business for at least one or two years. In this way, the lender can be confident in the proceeds of your business, which will be the primary source for repaying your loan. [Read related article: How to Build Business Credit]

Main takeaway: It is more difficult and expensive to get commercial real estate loans than consumer mortgage loans, and lenders require you to sign a personal guarantee.

How do commercial real estate loans differ from consumer loans?

Commercial real estate loans are very different from individual (consumer) loans. These loans have very different collateral and underwriting requirements, as well as different rates, terms and other characteristics.

For one thing, there are far fewer business loan securitization programs, compared to personal loans. This means that lenders typically have to hold many of these loans after they are issued, rather than selling them to investors, who bear the risk of loss if the borrower does not repay the loan.

As a result, lenders are more risk averse when issuing business loans. Minimum credit scores are usually higher, as are down payments. Mortgage insurance is also not an option for commercial loans, so income requirements and interest rates are usually higher.

In addition, business loans usually do not last as long as personal loans. Unlike home loans, which are usually issued for up to 30 years, commercial real estate loans often only last for five or 10 years. However, loan amortization can often be longer — up to 25 years typical — leaving borrowers with huge payments that they either have to repay or refinance at the end of their loan.

Main takeaway: Business loans have shorter terms than they are amortized, which means you will need to either refinance the loan at the end of the term or make a one-time payment.

Commercial Mortgage Loan Frequently Asked Questions

Business loans are much more complex than traditional home loans, and there are a lot of details that confuse small business owners. To help, we’ve tried to clear up some of the biggest sources of confusion for borrowers. Here are answers to some of the most frequently asked questions:

What is the minimum down payment for a commercial real estate loan?

The minimum down payment required for most business loans is usually 25% of the property’s purchase price (not including closing costs). However, down payments may be lower—up to 15% if you use mezzanine financing in addition to a mortgage, or 10% if you use an SBA loan.

What is the term of commercial real estate loans?

Commercial real estate loans usually do not last more than five or 10 years. However, loan amortizations can be much longer – up to 25 years. While this means that the loan payments are much lower than if they had to be paid back in full within five or 10 years, it also means that borrowers will be left with a balance outstanding at the end of the loan term, at which time borrowers will have to refinance that balance or Pay it off in a lump sum.

Can you use an SBA 7(a) loan to buy real estate?

Technically, the funds are issued through the SBA 7(a) program. can Used in real estate (buying, building, renovating or expanding). However, these loans are not designed for this purpose – for example, they are not guaranteed by real estate. As a result, these loans are usually more expensive than other loan options, including SBA 504 loans.

What credit score is required for an SBA loan?

Typically, qualifying for an SBA loan requires a minimum credit limit of 660. For SBA 504 loans, the minimum is usually 680.

Another thing to be aware of with SBA loans is that the Small Business Administration is not intended to be a lender of first choice but rather a lender of last resort. Before applying for an SBA loan, you should seek financing from other lenders.

Main takeaway: If you are unable to qualify for a term bank loan, you may be able to apply for an SBA loan. Although it may have lower payment requirements, the SBA is a lender of last resort.

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