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Commercial Mortgage

Starting or operating a business is a big financial investment, and this is especially true if a property purchase is on the horizon. If you’re considering buying real estate for a storefront, warehouse, office building or multifamily rental property, a commercial mortgage may help be able to help.

What Is a Business Mortgage?

A business mortgage, or a commercial mortgage, is a loan that’s taken out to pay for any real estate used for business purposes. Commercial mortgages are available through traditional banks and credit unions but can be available from other types of lenders as well.

Mortgages are secured loans that are backed by something other than good faith — in this case, the property you’re buying acts as collateral for the loan. When a bank or other lender provides a mortgage, it places a lien or legal claim against the property. This is why it’s very important to make your mortgage payments on time because if you don’t, the lien lets the bank foreclose on the property.

Even though the property itself is usually adequate collateral, some banks may also put a lien on other valuable assets, such as expensive company-owned equipment. This requirement is more common for younger companies or those that don’t have a consistent cash flow.

Mortgages are fixed-term loans that must be repaid on a set schedule. Personal mortgage loans can be repaid over 15 to 40 years, but commercial loan terms are often much shorter.

The type of mortgage you can get depends on many factors, from your business income to your personal finances.

Types of Business Mortgages

There are a few different subclassifications of commercial mortgage loans including:

  • Traditional mortgage loans can be used to finance various kinds of commercial property and are offered by all types of lenders including banks and credit unions
  • Permanent loans are the first mortgage loan taken out on a newly constructed commercial property with an average term of 20 to 25 years
  • Small Business Administration 7(a) loans are specifically for property purchases and offered through government-approved lenders
  • Commercial construction loans are designed for companies constructing a business premise rather than purchasing one that already exists

What Can You Buy with a Commercial Mortgage

A commercial mortgage can be used to buy office buildings, warehouses, properties you intend to rent to other businesses or residential tenants, storefronts, shopping plazas, malls or any other kind of property that can be used to do business. Property you intend to live in yourself can’t be financed with a commercial mortgage loan.

How Much Can I Borrow for a Business Mortgage?

Real estate purchased for business use can be expensive. It’s not uncommon for commercial property to cost thousands or even millions of dollars, especially large buildings or big plots of land. Commercial mortgage brokers take this into account, so these loans usually offer very high limits to accommodate a standard business real estate purchase. Some banks, like Wells Fargo, offer commercial business mortgages up to $500,000,000, while others, like U.S. Bank, don’t have a maximum limit.

Small business mortgage loans have lower limits than those available to larger companies. Most banks only lend three to four times a business’s revenue or cash flow, although there may be exceptions.

Down Payments and Business Mortgages?

Business mortgages usually doesn’t cover the full value of a property, which makes a down payment a necessity. For commercial real estate purchases, the down payment required is generally around 20%, but it may be higher. Traditional lenders such as JP Morgan Chase or U.S. Bank often require a larger down payment, while credit unions may be more flexible.

Who Can Get a Commercial Mortgage?

Individuals as well as registered corporations and other business entities such as LLCs and partnerships, construction organizations and real estate developers who plan to rent out space to other companies may qualify for a commercial mortgage.

If you plan to purchase a rental property but aren’t an experienced property developer or an established business owner, you may have difficulty getting a commercial mortgage. In this situation, applying for a business home loan or mortgage is usually a better choice. Standard residential mortgages, like the kind you take out when you buy a house to live in, can also be used to finance multi-family properties with less than five units.

What Do You Need to Get a Mortgage Loan?

The first step in getting a mortgage is completing an application and providing documentation. What’s needed can vary between lenders, but most will want to see:

  • Your driver’s license
  • Bank statements for your business
  • Personal bank statements
  • Business financial statements, such as a balance sheet and income statements
  • Credit scores and credit reports for each person on the mortgage application
  • Business and personal tax returns
  • Estimated net operating income, or the income you expect to generate with the property

Qualifying for a Commercial Mortgage

When you submit a mortgage application for a commercial property purchase, a lender will want an appraisal done to determine the value of the property and how much you can borrow. Some of the best mortgage lenders look at other factors when deciding whether or not to approve an application, including:

  • Time in business:The longer a company has been successfully operating in the eyes of the lender, the more likely it is to continue to do so. While there are no guarantees in business, longevity is a positive sign. Companies that have been operating for at least a year are more likely to qualify and get better mortgage terms.
  • Personal credit score:Even though your personal and business finances should be separate, how you manage your money personally can say a lot about how responsible you’ll be to repay a mortgage. If your personal credit score is good and you’re up to date on debt payments, you’re more likely to get a mortgage. Most lenders want to see a score of at least 600, but some may want to see 700 or above for a large loan.
  • Business cash flow:The cash your business generates is what you’ll use to make mortgage payments. If your business can’t provide enough cash flow to cover debts, you may not qualify for a commercial mortgage.

How Fast Can You Get a Commercial Mortgage?

The commercial property purchase process takes time, and so does getting a mortgage to finance a property.

The process takes a while in large part because of the high maximum borrowing limits with this type of loan. On average, it can take one to three months to get a business mortgage loan funded. Getting preapproved for a loan before starting your property search may help speed up the process a bit. Preapproval can also help you judge how much property you can afford. If you’re approved for a $300,000 mortgage, you can add on the amount you have for a down payment and only look at properties up to that value.

The Costs of Getting a Mortgage Loan

There are two primary costs associated with getting a commercial loan — interest and fees.

Interest Costs

Interest owed to the lender is the biggest expense of borrowing money with any kind of loan, especially a commercial mortgage.

Interest rates for commercial mortgages can vary a lot depending on the lender, the amount of the loan and the borrower’s credit history. In general, you can expect interest rates ranging from 5% to 10% or higher for a business mortgage. Interest is figured annually, but paid monthly. If you take out a $100,000 mortgage loan at 5% APR, you’ll owe $5,000 in interest per year, which translates into interest payments of $416.66 each month.

The interest rate often depends on the loan-to-value ratio, which is the amount of the loan in comparison to the value of the property. If you put 20% down on a $500,000 property, the Loan-to-Value (LTV) ratio is 80%. A lower LTV can generally get you a lower interest rate. Some lenders use a minimum LTV to approve a mortgage.

Fees and Closing Costs

Certain fees and costs are charged in addition to the interest on commercial mortgage loans. Many banks and other lenders charge an origination fee for processing a loan, largely to cover associated administrative costs. This is usually 0.5% to 1% of the mortgage amount.

Closing costs are another expense of borrowing with a commercial mortgage. Extra costs related to closing a real estate transaction may include appraisals, transfer taxes and title searches. Most buyers can expect to pay around 2% to 5% of the cost of a property.

Repaying a Small Business Mortgage Loan

Your business property loan needs to be repaid to your commercial mortgage broker based on the terms of your agreement, which generally means one payment per month. The payment amount is usually the same from month to month over a term of 20 years or longer, with a portion of each payment going toward the principal and the remainder toward interest. Property taxes and insurance may also be added to a mortgage payment on top of the principal and interest amounts.

Some commercial mortgages have monthly payments over a shorter term of seven or 10 years followed by a balloon payment for the remaining balance. These “balloon” loans are amortized over a longer period — often 30 years — so monthly payments are the same as with a 30-year term mortgage. When the balloon payment comes due, the mortgage will need to be paid off or refinanced, possibly at a higher interest rate.

Some businesses choose to contribute a larger amount than is required on their monthly mortgage payments in an effort to pay off the loan sooner. This is fine for most loans, but some lenders penalize borrowers who do this — so be sure you know your lender’s policies for early or accelerated repayment before finalizing the loan.

Comparing Commercial Mortgage Terms

Commercial mortgage requirements and terms can vary greatly between lenders, so it’s important to understand what’s involved before you choose a lender. Here’s a comparison of basic terms and application requirements from three reputable commercial mortgage lenders.

US BankJP Morgan ChaseWells Fargo
Amount Speed of FundingNo Limit 30 - 45 daysUp to $25,000,000 Within 45 daysUp to $500,000,000 4 - 6 weeks
Personal Credit score700+Prime BorrowersN/A
Time in business1 - 5 YearNo specific requirementNot a set requirement
Business cash flowN/AN/AN/A
Cost of FundingLTV: Up to 80% Down Payment: 20 – 35% Interest Rates: 4.75 – 6.75%, variable or fixed Origination Fees: 0 – 1% Closing Costs: 2 – 5%LTV: Up to 80% Down Payment: 20 – 30% Interest Rates: 5 – 9% Fees: 1 – 3% Closing Costs: 1 – 2%LTV: Up to 80% Down Payment: 20-30% Interest Rates: 5 – 10% Fees: 1 – 3% Closing Costs: 0.5 – 1%
Payback termsTerms of 5, 10 and 15 years and amortization up to 25 years1 - 10 years5 - 10 years
Collateral RequiredYesNo additional requiredMay require additional collateral from other investments
Personal Guarantee RequiredYesNo additional requiredN/A
ProsNo limit to how much you can borrow Competitive interest ratesStreamlined application process Competitive ratesVery high maximum loan amount Competitive fees
ConsHigh standards to qualify High feesNot easy to qualify for Application process can be slowMay take longer to receive money Not a great option for new investors
Best ForBorrowers who need a large loan amount because they don’t have a maximum loan size Prime borrowers looking for the lowest possible interest rates and longest repayment termsBest for multifamily, industrial, office, retail or mixed-use properties and projectsExperienced developers looking to finance large projects

Taking the Next Step

If you’re looking for the right loan for your next property purchase, Lendzi can help. With clear, transparent terms and low rates on loans such as commercial mortgages, we can make sure you find your perfect fit. Contact us today to get started on your loan application.

Pros and Cons of Commercial Mortgages

For those who want to buy property for business purposes, there’s often no better choice than a commercial mortgage. However, these loans aren’t right for all situations, so the following pros and cons should be taken into account.

Prons
  • A commercial mortgage is ideal for those looking to invest in business real estate. With this type of secured loan, interest rates are lower than other lending options, and the high caps make it possible to buy expensive commercial property. Loan terms can be long, giving borrowers plenty of time to repay the balance. Every loan payment increases equity in the property, providing flexibility for extracting cash in the future.
Cons
  • Commercial mortgage loans can only be used to purchase real estate, so any other expenses have to be funded through another loan or the cash you have on hand. Loans usually can't be used to cover the full cost of a property, so a down payment of anywhere from 10% to 30% is typically required. A mortgage can also come with additional fees at closing, which drives up borrowing costs.

Suggested Resources

  • How To Get A Personal Loan With Bad Credit?

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  • Debt Consolidation For Businesses: The Biggest Myths

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  • What You Need to Know About Personal Mortgages

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  • A Real Estate Investors’ Guide to Hard Money Loans

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