How to Apply for a Commercial Mortgage
Commercial mortgages are offered to businesses and backed by some valuable asset such as apartment or office buildings, warehouses, shopping centers, and residential real estate. Banks offer lower interest rates when collateral is present. Other lenders include insurance companies, government agencies, conduit lenders, and mortgage brokers.
Types of Collateral
The first step to applying for a commercial mortgage is to look at your assets. There are different types of collateral such as property on paper, inventory, farm produce, and machinery and equipment. Other assets that are accepted by financial institutions include supplies, livestock, consumer goods, work in process, and crops. The type of asset to offer depends on the bank, loan amount, and purpose. With this in mind, other examples include materials consumed, processed, or used, raw materials, plants, and others. The real estate must be a multi-residential, retail, or commercial property. Other options include industrial buildings and multi-purpose units.
Requirements and Criteria
There are certain requirements to meet when applying for a commercial mortgage. Banks have different criteria when it comes to financial information, credit scores, debt to cash flow ratios, cash flows, and others. During downturns in your industry or sector and in tough economic times, some companies face profit shortages, losses, and temporary negative cash flows. The requirements also vary depending on whether your financial establishment is a bank or a non-bank lender. The terms and conditions also vary. As a rule, non-bank lenders charge slightly higher interest rates. The amortization period depends on whether the funding will be used to finance a multi-residential building or another type of property. The former comes with longer amortization periods than the latter.
Many lenders require that applicants present their business plan and cash flow projections and estimates. Other documents include your assets and liabilities statement, bank and credit statements, and your management figures. You may have to present your certified or audited accounts as well. Some banks also request a passing environmental report and a current appraisal. Other financial institutions require background checks and engineering reports. Banks also do due diligence in the form of a financial review or a site tour and assessment.
Types of Loans to Apply for
The requirements to meet depend on the type of mortgage loan. There are different types, including sale leaseback, land sale leaseback, joint venture equity financing, installment sale financing, floating rate loans, and others. In general, financing can be divided into two main categories – commercial and owner-occupier mortgages. The former is a type of loan that is used for investment purposes. Thus businesses use the money to finance the purchase of land or properties to rent out. Owner-occupier mortgages are offered to applicants who need money to purchase land or real estate to be used for their business operations. Borrowers also have a choice between an interest-only and capital repayment mortgage. The latter is a standard type of loan whereby the outstanding balance is repaid in installments. With interest-only loans, borrowers make interest payments only while the capital is paid back through different investment options, asset sales, insurance, or another arrangement. The documents and type of collateral required to back the loan depend on the mortgage of choice.
Borrowers who need a larger loan may want to apply for subordinate financing. There are two types to consider – preferred equity and mezzanine note. The downside is the high interest rate compared to other types of financing.
Finally, when applying for a commercial mortgage, ask for the amortization period, repayment schedule, prepayment penalties, lock-out provisions, and so on. In some cases, borrowers are subject to defeasance penalty. Some financial institutions require that the loan is replaced by treasury securities. This is a type of prepayment penalty. The down payment is another factor to consider. Lenders usually require a deposit or down payment of 15 to 20 percent. They offer both fixed and adjustable rate mortgage loans.
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