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Commercial Real Estate Loans: What You Need to Know

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A commercial real estate loan is an excellent way to finance the purchase or renovation of commercial property. However, to qualify for a commercial real estate loan, you’ll need to meet specific requirements. This article will go over the basics of scoring a commercial real estate loan.

What Are Commercial Real Estate Loans, and Why Do You Need One?

A commercial real estate loan is a mortgage loan specifically for purchasing or financing commercial property. These loans are often used to buy a property that will generate income, such as an office building or a shopping center. Office buildings, retail businesses, restaurants, warehouses, and other enterprises are examples of commercial property.

Different Loan Types

Several types of commercial real estate loans are available. The most common include:

SBA 504 loans: These are long-term, fixed-rate loans that allow you to purchase significant fixed assets, such as buildings.

SBA 7 (a) loans: These are short-term to medium-term variable-rate loans for various purposes, including working capital.

Bridge loans: These are short-term, high-interest loans used to finance the purchase of a property before long-term financing is arranged.

CMBS Loans: Commercial mortgage-backed securities (CMBS) loans are long-term, fixed-rate loans securitized by a pool of commercial mortgages.

Qualifying for a Commercial Real Estate Loan

Lenders will consider several factors when determining whether you qualify for a commercial real estate loan. Keep in mind that banks tend to have the strictest requirements, and are more rigid on things like credit score and business history.

Debt-to-income ratio: The debt-to-income ratio is the percentage of your monthly income towards paying debts. Banks typically want to see a debt-to-income ratio of 40% or less.

Credit score: Your credit score is a measure of your creditworthiness. Banks usually want to see a credit score of 680 or higher. On the other hand, online lenders may offer more options for various types of credit scores.

Net worth: Your net worth is the value of your assets minus your liabilities. Lenders typically want to see a positive net worth.

Liquidity: Liquidity is a measure of your ability to pay short-term debts. Banks typically want to see a liquidity ratio of 1.5 or higher, while online lenders may not always impose liquidity requirements

Experience: Lenders often want to see evidence that you have experience in the commercial real estate industry.

Property type: The property you’re buying or refinancing must be commercial property.

Loan amount: The loan amount you’re seeking must be within the lender’s maximum loan amount.

Loan purpose: The loan must be for a commercial purpose, such as purchasing or renovating a commercial property.

Down payment: Banks will typically require you to make a down payment of at least 20% of the purchase price.

Besides the points outlined above, lenders will also consider the property’s value, location, and other factors.

How Fast is the Process?

The time to get a commercial real estate loan approved and funded can vary. SBA 504 loans, for example, can take up to 90 days to fund. SBA 7 (a) loans can be approved and funded in as little as one week. Bridge loans can be approved and funded in as little as two days. Overall, you’ll find faster funding times when you work with online lenders over banks.

What’s the Interest Rate?

The interest rate for a commercial real estate loan will vary depending on the loan type, the amount of the loan, and your creditworthiness. SBA 504 loans have a lower interest rate than SBA 7 (a) loans. Bridge loans typically have a higher interest rate than other commercial real estate loans.

The Bottom Line

A commercial loan for real estate is a substantial investment and one that you should take seriously. By understanding the basics of what to expect when applying for a loan, you can streamline the process and be better prepared to meet with a lender.

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