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 Commercial mortgage loans are designed to fund the purchase of land, commercial or income properties for a business. When applying for a commercial mortgage you should be aware of some important aspects about these types of loans.
Commercial and income properties are viewed more conventionally then residential properties. Commercial lenders usually require down payment of 20% or more of the purchase price. The balance of 80% or less is funded as a mortgage loan by either a bank or mortgage company.
Commercial loan applications are viewed and evaluated separately on a case by case basis. However when making a loan decision there are a few important factors commercial lenders look for. These factors are:
- Property assessment and analysis:
- Location of the property,
- Local market condition,
- Age of the building,
- Building appearance,
- Building accessibility
- Fair Market Value
- Fair Market Rent.
- Property Loan to Value Ratio:
Loan to Value Ratio is the percentage of the loan amount divided by the monetary value of the property. Keep in mind that the value of the commercial property is determined by the property appraisal, not by purchase price. The average LTV ratio for commercial properties is 80% or less. However different commercial lenders have different guidelines, therefore different requirements for LTV. Before you apply for a commercial mortgage you should check with the lender.
- Property Financial Analysis
One of the most important factors when making a funding decision is the debt coverage ratio (DCR) of the commercial or income property. Debt coverage ratio (DCR) is the percentage of the net monthly income of the investment property divided by the monthly debt. In most cases commercial lenders would lend $1.00 for every $1.00 to $1.10 net monthly income. Before you apply for a commercial mortgage you should check the lender's requirement for DCR, so you don't waste time and money submitting applications.
- Credit worthiness
The credit worthiness of the company is evaluated and considered by the potential lender prior to making a commercial loan decision. If the company is less than 3 years old the credit history of the company principals is also considered.
Documents required for a commercial mortgage application:
- Company financial statements
- Three years of company income taxes
- Projected cash flow for next 12 months
- Company profit & loss statements
- Company balance statement
- Collateral sheet
- Business plan
- Federal and state tax information
- Personal financial statements
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