By Savion Sage
Since 2010, mortgages for businesses, commonly called commercial mortgages, have been getting the attention of all the prominent American banks. By following the statistics, you can assess how commercial-mortgage loans have recuperated during these years, including those in the self-storage industry. In the times of financial crisis, consumers are more interested in paying off debt than investing in real estate. So banks find it easier to lend to companies rather than fetching general consumers.
With the gradual increase in the commercial-mortgage count, banks and other lending institutions have increased the opportunities for businesses by offering numerous lending programs and repayment options. All self-storage owners and investors have to do is select the most suitable option.
Mortgages for commercial purposes are essential, helping a business grow by providing necessary funding for a real estate purchase. With the help of commercial-mortgage loan, you can purchase land to construct new buildings and buy multiple properties. Here are some benefits of a commercial mortgage:
- Assists in cash-flow management. There are several types of commercial mortgages available such as fixed-rate, variable-amortized, mortgages with balloon-payment options and interest-only. Among them, with the help of fixed-rate mortgages, you get a fixed interest rate charged on the loan. Due to the static interest rate, it’s possible to manage the cash flow in business. The monthly payments remain the same, keeping the overall property cost under control.
- Loan terms are generally assumable. If you decide to sell your property in the middle of the tenure, the terms of the existing mortgage loan will be carried over to the new buyer. The new buyer won’t have to go through the approval process again.
Obtaining a Commercial Mortgage Loan
The eligibility criteria for commercial mortgages is far more difficult than for home mortgages. Your credit history, prospects of your business, expansion plans and cash flow will be reviewed by potential lenders. The two significant ratios every lender will check are:
- The debt-service coverage ratio (DSCR): This is evaluated after dividing the net operating income of your business by the monthly mortgage payment, including the interest rate. To obtain a commercial mortgage, you need a ratio of 1.25 or higher. Having a higher ratio will only make it easier for you to convince the lender.
- Loan-to-value ratio (LTV): This is evaluated after dividing the overall amount you need to borrow by the appraised value of your property. Suppose you decided to put 35 percent down and borrow the rest. Your LTV will be 0.65. To get a reasonable loan, you must work on increasing the down payment and reducing this ratio.
The Loan Process
The application and approval process usually takes about 60 days but could be longer depending on your circumstances. Here are the steps you’ll follow to obtain a commercial mortgage loan:
- Zero in on the property first. You must have a property in mind before applying for a commercial-mortgage loan. This will make it easier for your broker to find the right lender. You must choose the property, keeping your affordability in mind.
- Contact the right lender. Set up meetings with several lenders and find which offer the best possible terms. It may take time to find the right lender, so be patient.
- Apply with proper documents. You’ll need to provide the last three years of financial statements for any businesses you own along with your personal finances. You must submit your bank records, documents related to tax returns and other operating statements, too. The application process may require you to pay fees, so ask your lender.
- Get assistance of an experienced lawyer. If possible, ask an attorney to aid in your quest for a commercial-mortgage loan. He can often assist you in understanding the loan terms.
- Fulfill the underwriting requirements. After the document analysis and environmental inspection, the lender may approve or reject the application. If the application is approved, the next thing will be the underwriting process. The lender will underwrite all the terms and arrange funds for your commercial-property mortgage. This process may take a few months, depending on the complexity of your deal.
The process for obtaining a commercial-mortgage loan may take time and your financial documents must be accurate. If you have enough confidence on the financial prospects of your business, then you can apply for the loan. Otherwise, it’ll be better to wait and work on improving your business prospects first.
Savion Sage is an experienced financial writer who has specialization in business development. He writes informative financial articles for numerous business-related blogs and websites. For more information, visit www.facebook.com/mortgagefit.