Income-producing property used solely for business (rather than residential) purposes is called real estate. Such as office buildings, shopping centers, retail malls, complexes, and hotels. In financing, it includes the development, acquisition, and construction of these properties. It is typically accomplished through commercial real estate loans: mortgages secured on the commercial property.
What is a Commercial Real Estate Loan?
Commercial Real Estate loans typically range from five years or less to 20 years. The commercial loan has loan-to-value ratios which generally fall into the 65% to 80% range. Banks, home mortgages, warehouse, storage, and manufacturing facilities; hospitals and other medical facilities; restaurants; recreation parks; and raw land, and independent lenders are actively involved in making loans on commercial real estate. Commercial Loans are usually secured loans, with the property purchased serving as collateral. Larger down payments are required compared to residential mortgage loans; the large size of most commercial real estate loans poses a greater risk for the lender.
Types of Commercial Real Estate Loans
In commercial real estate lending, there are dozens of specific financing structures that may be utilized. There are five major categories of commercial loans for real estate purchases – seller-financed loans, ordinary commercial real estate loans, loans obtained through the Small Business Administration (SBA), bridge loans, and hard money loans.
A business looking to buy a commercial property might obtain financing directly from the seller with residential mortgage loans. The payment terms are more flexible and buyers get an advantage of the lower rate of interest.
In the purchase of income-producing properties, seller-financed loans are more commonly available, such as when a company is purchasing a property from an individual rather than from another company or an apartment complex.
Ordinary commercial real estate loans
Residential mortgage financing usually comes under ordinary commercial real estate loans. If you want permanent loans then ordinary commercial real estate loans are the best option. It has loan collateral on the purchase of a property.
Small businesses might get an SBA loan, in the United States, which offers several advantages. The borrower can usually get a substantially more favorable interest rate since the lender has much lower risk exposure when the SBA guarantees at least a portion of a commercial real estate loan.
Also, SBA loan funds can be used not just for working capital and property purchases but also for buying machinery, debt restructuring, purchasing inventory, and other purposes. For borrowers is the SBA 7(a) loan program, offers maximum flexibility.
Bridge loans are short-term commercial real estate loans. The bridge loan term lies in the range of six months to two years. Commercial developers frequently use bridge loans, for example, expect to complete construction of an office building on purchased land, which they will then sell to another party. Homeowners use bridge loans to buy new homes.
Bridge loans have a faster application process and approval. But it also has a high origination fee and a high rate of interest. So, companies can get a bridge loan if they have a good credit score and low debt-to-income ratios.
Hard money loans
Usually, private investors and private companies offer hard money loans. Hard money loans are short-term. They do not come from traditional loans. Hard money loans are free to make their own rules about what credit scores or debt-to-income ratios they expect their borrowers to have. They are costly and have a high rate of interest. Hard money loans are secured loans. For purchasing an investment property, commercial property, or home, hard money loans are a great option.
Therefore, often hard money loans are in the range of one year or less. They are similar to bridge loans if compared to duration.
Other Sources for getting loans
Life insurance companies look for “risk-free” investments. Low-risk investments that offer better returns are treasury bonds.
Crowdfunding is a growing source of commercial real estate lending. Another name for it is online peer-to-peer investing.
Investors can specify their particular areas of interest, both in terms of project types and geography. Crowdfunded real estate investment trusts (REITs) are growing over the last few years.
How to qualify for a real estate loan?
Check Your Credit
For credit scores, there are many evaluations. Credit scores ranges from: excellent credit (750 – 850), good credit (700 -749), fair credit (650 – 699), poor credit (600 – 649), bad credit (300 – 600). The calculation of a credit score has to consider these 5 points:
Types of Accounts = 10 percent
Credit Inquiries = 10 percent
Length of Credit History = 15 percent
Outstanding Balances = 30 percent
Payment History = 35 percent
Perform A Credit Audit
Once you get a confirmed credit score and credit report, you have to perform a credit examination. This process highlights your credit report to outline where you went wrong, what you did right, and noting how you can improve. This is the first step in the beginning stages of applying for a home loan. Hence, it can sometimes take years, months, and even weeks to make the necessary adjustments.
Pay Off Debt
A real estate loan is debt-to-income and is another element to obtain a real estate loan. Lenders will compare how much you spend versus how much you make to determine how much you can reasonably afford. In most cases, if the debt is more than 36 percent of the income, lenders will not approve a homebuyer.
Therefore, securing a real estate loan is not an easy process. You have to check every detail. You should take a real estate loan according to credit score, and debt to loan ratio payment.