A loan in which real estate is used as collateral - a guarantee that the loan will be repaid and on time - is usually called a commercial mortgage. While it is much like a residential mortgage, the difference is simply that the collateral and the building purchased with the mortgage is used for commercial rather than residential purposes.
A loan would be considered a commercial mortgage if, for instance, an entrepreneur were moving from his home office to a storefront retail, office or warehouse location due to the growth of her business.
If, however, she simply wanted to expand her home office by another few feet and needed a mortgage loan to do so that loan would probably be considered a residential rather than commercial mortgage.
Another difference between a commercial mortgage and a residential mortgage is how the financial institution looks at the ability to pay the loan. The okay for a residential mortgage, as well as the rate, are determined by the borrowers financial situation - her or his credit history, and current ability to repay the debt.
When considering a business mortgage, however, a lender would look at the value and quality of the property being purchased by way of that commercial mortgage, and its ability to bring in revenue.
Rental property in a market that is glutted would be looked on less favorably even when the borrower has sterling credit than a mortgage for commercial rental property in a town that has a scarcity of rentals and people moving in all the time.
Even if the borrower had less than perfect or even some bad credit, he or she would be favored over that person with perfect credit in the town that doesnt bode well for full rental occupancy.
Business mortgage loans are charged a considerably higher rate of interest than are residential mortgage loans. These are nearly always fixed rate loans, however, which means that that borrower pays the same interest rate throughout the life of the loan.
There are some capped or variable rate business mortgage loans, but theyre not in the majority.
If you are an experienced home owner and mortgage borrower that is just setting out to secure a business mortgage for the first time you may be unpleasantly by how much more complicated and time consuming the commercial mortgage process is than its residential counterpart.
That is because the legislated guidelines require lenders to rely on the propertys stability and income history as a means of determining its potential for future profit. It is only after this revenue potential has been determined to be promising that the credit history, financial strength and assets of the commercial borrower are even looked at.
The mortgage application is extensive enough that youll probably benefit from working with a commercial mortgage broker. Youll probably have to provide financial history about the property and your own situation for the last two years.
The format in which this information must be provided is generally quite strict and an experienced and knowledgeable mortgage broker will get you past these commercial mortgage hurdles and on your way to a great fixed or variable rate commercial property mortgage.
The biggest single challenge facing developers with potential commercial projects is actually getting them funded.
However, with growing competition in the finance industry, relaxation of lending rules, and coffers full of money to lend, raising the funds for large scale investment projects can be simple and fast ? as long as those seeking to raise the funds know how to go about it properly. The first place to start looking is the Internet. Increasingly, deals are being done online - and done fast ? as long as you understand the project financing process.
Increasingly, investor pools are prepared to underwrite commercial property ventures ? worth many hundreds of millions of dollars - with no credit checks, no complicated documentation, and no income verification. A commercial transaction is defined as one involving a commercial project which includes real estate as its foundation. Typically, there are two ways in which loans are made available:
The first is known as a ?conforming? loan, when full documentation with limited concern for credit is required, while the second is ?non-conforming? where there is no documentation required, no credit checks, and no income verification. The Loan-to-Value (LTV) aspect of all commercial transactions is one of the major considerations when providing finance. With non-conforming loans, typically up to 90% of the value of the project can be borrowed, depending on the project type. For example, non-conforming reacquisition transactions require a maximum of 50% LTV for consideration. Conforming commercial transactions offer considerable extended options. Any LTV, regardless of transaction type, purchase or refinance, is usually considered, but the following are also taken into account:
Conforming transactions approvals rely heavily on what cash an applicant has vested in a submitted project. Substitutes for cash include either collateral or a winning pro forma, but not less. Equity in real estate is not generally considered a viable substitute. Regardless of what an applicant might choose to substitute cash with, in order to justify an approval, no substitute can ever be effective without a project that makes sense.
A winning pro forma, if truly winning, can easily substitute for cash and ultimately lead to 100% LTV funding, though not without sufficient cash for closing. Commercial transactions generally take 30-60 days to close, providing they are approved and accepted. Obviously, uncomplicated transactions contribute to a speedier conclusion, whereas complicated transactions, or those requiring an inordinate amount of time to decipher, prolong the processing period.
Uncomplicated transactions are defined as those characterized by simplicity, such as a commercial building in need of refinancing. A more complicated transaction would be a development project, such as a new casino.Non-conforming applications are approved or declined much faster than conforming ones. Typically, an approval decision for a non-conforming transaction will be rendered within 2-7 days. Uncomplicated transactions are defined as those characterized by simplicity, such as a commercial building in need of refinancing. A more complicated transaction would be a development project, such as a new casino.
The bottom line with private investors is that generally they are sophisticated, non-predatory and do not jump on projects saddled with collateral or equity. They are, however, keen to do projects that make sense. Again, credit is of little concern on conforming projects and not required at all on non-conforming projects.
Both James Copper & Helen Bassett are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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