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A commercial mortgage, also referred to as a commercial real estate loan, is used for purchasing, refurbishing, or refinancing properties that are intended for business purposes. This type of loan can be used for various types of properties, including office buildings, retail spaces, industrial warehouses, and more. Similar to a residential mortgage, a commercial mortgage is secured by the property itself.
While a commercial mortgage bears several similarities to a home mortgage, there are several key differences to be aware of.
Commercial loans and real estate loans have key differences in terms and amortization schedules. For commercial loans, the terms are shorter than residential loans, usually between five and 25 years. In certain commercial real estate agreements, the loan term will be different from the amortization schedule.
For example, you might see a 10-year term with a 20-year amortization schedule. This means that the borrower will make payments based on a 20-year schedule, but the loan will be due after 10 years. This results in smaller payments throughout the 10-year term, followed by one large balloon payment at the end.
Whereas residential loans might allow financing up to 95%—or even 100% in certain cases—of the property’s value, commercial real estate loans typically cap at around 70% to 80% of the property’s value. This is because, in the eyes of the lender, commercial properties may carry a higher degree of risk compared to residential properties.
As a result, prospective borrowers may need to have a significant amount of capital on hand to cover the remaining value of the property. This difference underscores the importance of having a robust financial strategy before pursuing a commercial property loan or commercial mortgage.
Commercial mortgage interest rates can be as low as 6.25%, making the loans an incredibly cost-effective form of capital.To get a ballpark idea of how much your commercial mortgage payments could be, check out our commercial real estate calculator. Plug in a few numbers and we’ll do the math for you.
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If your business doesn’t match some of the qualifiers below, it may be more challenging to receive funding from our lending partners.
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A conventional commercial mortgage is the most traditional type of loan for commercial real estate. It usually requires a high credit score, a significant down payment, and an established business history to qualify.
SBA 504 loans are partially backed by the Small Business Administration and can be used only for the purchase of real estate. These loans offer favorable interest rates and longer terms, making them an attractive option for many business owners. The 10% down payment criteria can be significantly less than that of a conventional commercial mortgage, making it an appealing choice for small businesses. These loans can be used only if the owner occupies at least 51% of the property.
SBA 7(a) loans can be used for any business expense including purchasing or refinancing commercial real estate. These loans offer lower down payments and longer repayment terms compared to conventional loans, making them more accessible for businesses with limited capital.
Sure, you can go the bank route with a long application process and 75% rejection rate. But if you’re looking for financing in this lifetime, Lendio offers a faster, easier application process.
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Sterling HannemannCo-Owner of Seven Brothers
Chloria ChandlerOwner of Bobbee O’s BBQ
You can use a commercial mortgage to purchase a commercial property—whether it’s office space, a factory, retail, or restaurant space. If you can’t find an existing building that’s right for your needs, you can use your building loan to cover the construction costs of building a new space. Need to expand? A commercial mortgage covers that.
Yes, you can extend your payment terms and adjust your interest rate by refinancing with a commercial mortgage.
Yes. Would updating your building help you to attract more customers? A commercial mortgage can give you the financing to make it happen. Restaurants and retailers have demonstrated the ways an updated interior can drive customers, bringing the owners a sweet return on their investment.
To secure a commercial mortgage, there are several important steps to follow:
Remember that obtaining a commercial mortgage is a significant commitment. Be sure to consult with a financial advisor or loan specialist to ensure you’re making the best decision for your business.
A loan-to-value ratio (LTV) is the percentage of a property’s value that is being financed through a loan. This ratio is calculated by dividing the loan amount by the appraised value of the property. For example, if you are seeking a commercial mortgage for $500,000 on a property valued at $1 million, your LTV would be 50%.
A lower LTV generally indicates less risk for lenders and may result in more favorable loan terms such as a lower interest rate. Lenders will often require a specific maximum LTV ratio before approving a commercial mortgage. However, keep in mind that other factors—such as credit score, business financials, and down payment—also play a role in determining the terms of a commercial mortgage.
Debt-service coverage ratio (DSCR) is a measure of a borrower’s ability to make loan payments on time. It is calculated by dividing the property’s net operating income (NOI) by the required annual debt service. A higher DSCR indicates that the borrower has sufficient cash flow to cover their loan payments, which can make them more attractive to lenders. Typically, lenders will look for a minimum DSCR of 1.25—meaning that the property generates 25% more cash than needed to cover its debt obligations. A higher DSCR may result in lower interest rates and better loan terms from lenders.
Yes, many commercial mortgages allow for prepayment of the loan. However, there may be penalties or fees associated with paying off the loan early. Be sure to review your loan agreement and discuss any potential prepayment options with your lender before signing on the dotted line.
A recourse commercial property loan means that the borrower is personally liable for the loan and any default could result in the lender seizing personal assets to pay off the debt.
A non-recourse commercial property loan limits the lender’s ability to seek repayment beyond the collateralized property. In this case, if there is a default on the loan, the lender can only seize and sell the property to recoup their losses.
Yes, collateral is typically required for a commercial property loan. This is because the property itself serves as security for the loan. In the event that the borrower defaults on their payments, the lender can take possession of the property and sell it to recoup their losses. The value and condition of the property will play a significant role in determining loan eligibility and terms.
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