COMMERCIAL REAL ESTATE LOAN: Overview & Requirements

COMMERCIAL REAL ESTATE LOAN

Purchasing or investing in commercial real estate can be both exciting and stressful. But most business owners will not be able to buy a commercial property without a commercial mortgage loan. Fortunately, commercial real estate loans are available to help make these dreams a reality—even if you don’t have any cash or other assets to put up as collateral. Many commercial real estate financing options are available at reasonable rates and terms. We’ll go over the commercial real estate loan interest rate, the application requirements, and how to use the loan calculator without any hassles.

What is a Commercial Real Estate Loan? 

A commercial building loan is a mortgage or loan used to buy an existing building, add on to an existing property, or build something new. Because the property itself serves as collateral, it is a secured real estate loan.
Commercial loans, as opposed to traditional mortgages, are given to businesses rather than individuals. They are also only for property that is intended to generate business income.

Commercial building loans are often used to buy or build a wide range of structures for work, such as:

  • Office spaces
  • Retail locations
  • Hotels
  • Restaurants
  • Multi-family real estate
  • Industrial buildings 
  • And “special purpose” buildings

Commercial building loans may be the only way for your business to buy a property if it uses its working capital for rent and growth. As a result, it is critical to understand what they are and follow the appropriate procedures to obtain a commercial real estate loan.

Where Can I Get a Commercial Real Estate Loan?

A commercial real estate loan can be obtained in various ways, including through banks, online lenders, hard money lenders, commercial mortgage lenders, commercial construction lenders, or SBA loans.

A commercial real estate loan has various requirements and interest rates. Before applying, consider each lender’s pros and cons to determine which is best for you.

#1. Banks

Commercial building loans are available from both national and regional banks. Most regional banks typically cap loans at $1 million; therefore, national institutions should be considered if you need more money.

Banks can provide long-term financing solutions as well as competitive loan interest rates.
On the other hand, a commercial real estate loan has strict qualification requirements, and it might be tough to acquire financing if you don’t have strong credit. In addition, the funding process is notoriously slow.

#2. Online Lenders

Online lenders, sometimes known as fintech lenders, are a viable choice for acquiring this type of loan. Unlike banks, commercial real estate lenders often have a faster and less stringent underwriting process. It’s also easier to qualify for commercial building loans through an online lender than a bank, especially if you’ve had credit problems.

#3. Hard Money Lenders

Short-term loans are frequently utilized to secure a property not yet qualified for long-term financing. Before applying for a mortgage, funding may be utilized to negotiate a good deal on a commercial property or to make property upgrades.

#4. SBA 7(a) Loan

These loans provide extensive finance with maturities of up to 25 years and are available for purchasing land and buildings, performing improvements, or initiating new development.

#5. SBA 504 Loan

A 504 loan is designed expressly for acquiring owner-occupied real estate and is typically divided into two sections, with one component coming from a bank and the other from a development company.

Commercial Real Estate Loan Requirements

Qualifying for commercial construction finance might be complicated by details such as the type of property for which the loan will be used. To receive a commercial real estate loan, you’ll need to present various paperwork depending on whether you’re buying real estate or require funding for a building.

#1. Real Estate

Typical commercial real estate loan requirements include:

  • A sufficient net operating income to cover loan obligations
  • A good credit score or a credit score from the FICO Small Business Scoring Service (SBSS).
  • The corporation or limited liability structure
  • A high personal credit score and a solid financial history
  • Property type and value information, including an appraisal
  • Financial documents, including tax returns, reports, business records, cash flow estimates, and a business plan

#2. Construction

Commercial building loans also necessitate a substantial amount of paperwork. You may be required to give the following information in addition to your personal and business financial information:

  • Estimates from contractors
  • Project blueprints
  • Building performance forecasts, known as “proforma”

Banks also want to know that a project is proceeding as planned, and you will most likely be required to provide updates as work advances. The building is a high-risk investment, and traditional lenders are wary of supporting projects that cannot pay off as expected.

Commercial Real Estate Loan Interest Rate

The interest rate on a commercial real estate loan is usually between 2.2% and 18%. The interest rate you receive is determined by the type of commercial real estate loan you select, your qualifications as a borrower, and the type of building or project you’re financing. We looked at various loan types and properties to find the average interest rates for commercial real estate. This will help you compare rates.

Average Commercial Real Estate Loan Rates by Loan Type

Interest rates on commercial real estate loans can be as low as 2.231%, depending on your loan type. Standard commercial mortgages and loans backed by the government, like SBA loans from the Small Business Administration or USDA loans from the Department of Agriculture, usually have the lowest interest rates and the highest loan-to-value (LTV) ratios.

A standard commercial real estate loan application takes a lot of time and paperwork, and only prime or near-prime borrowers are likely to be approved. If you have bad credit, your business finances aren’t great, or if the property you want to buy needs to be fixed up, you’ll have to pay higher interest rates and put down more money to get a standard commercial real estate loan.

Average Commercial Real Estate Loan Rates for Investment Properties

Loans for investment properties might have interest rates as low as 3.77%. With an investment property loan, you may buy a house to repair and resell for a profit. However, the LTV ratios on these loans will be lower than on owner-occupied commercial real estate loans, requiring you to put down more money. The LTV ratio for these loans ranges between 66% and 73% on average. So, if you buy a $1 million building, the lender may only issue you a loan for $730K, requiring you to put down $270K.

Average Commercial Real Estate Loan Rates for Building an Investment Property

Building rather than acquiring an investment property will result in higher interest rates—rates now range from 6.74% to 8.15%—because constructing a new building is a riskier endeavor than purchasing a finished one. Therefore banks charge higher interest rates to compensate for this risk. However, because the LTV ratio on a construction loan is typically higher than that on an investment property loan, you won’t need to put as much money down.

Commercial Real Estate Loan Calculator

So, before you take out a commercial real estate loan for your small business, use our commercial real estate loan calculator or business mortgage calculator to do the arithmetic.

Using a Commercial Real Estate Loan Calculator

A commercial real estate loan calculator estimates the true cost of your loan based on some basic information about your loan, including both the principal (your loan amount) and interest.

You’ll need the following information to enter into your commercial real estate loan calculator:

  • The loan amount
  • The rate of interest
  • Repayment period (in months or years)

Then, using the commercial real estate loan calculator, you can see how the entire loan cost increases as those variables vary.
Assume you’re thinking about a $300,000 commercial mortgage with an 8% interest rate. The commercial real estate loan calculator shows that a five-year payback term results in a total loan cost of $364,975.10. However, a three-year term reduces the amount to $338,432.75 and saves you thousands.

A commercial real estate loan calculator can also estimate your monthly payments. ($6,082.92 for a 5-year term or $9,400.91 for a 3-year term.)

It will even show you what proportion of your loan cost goes toward interest and what percentage goes toward the loan principle. (18% is paid in interest with a five-year term, and 11% is paid in interest with a three-year term.)
A commercial mortgage calculator allows you to view a loan amortization table after completing your basic calculations.

A loan calculator may help with various tasks, including determining the overall cost of a commercial real estate loan you’re looking for and comparing the expenses of various forms of commercial loans.

What is an example of a commercial loan?

The term “commercial” is simply another word for “business.” As a result, a commercial loan, as opposed to a consumer loan, is simply a business loan. A commercial loan is used to purchase a restaurant and a building.

What does a commercial loan do?

A commercial loan is a debt-based financing arrangement between a company and a financial institution like a bank. It is typically used to fund large capital expenditures and/or cover operational costs that the company could not otherwise afford.

What is the most common commercial mortgage?

Business Line of Credit

Business lines of credit are one of the most common commercial real estate loans. They’re frequently likened to credit cards. Lines of credit, on the other hand, have bigger funding quantities and lower interest rates. Furthermore, this type of funding is highly adaptable.

Who is eligible for a commercial mortgage?

A commercial real estate loan is a financing used to purchase property for business purposes. To secure a commercial loan, you’ll need to have strong credit, make a down payment of 25% or more, and plan to use most of the property being funded for your business.

How many years is a commercial loan?

Unlike home loans, commercial loans usually have terms of five or less to twenty years, and the time it takes to pay off the loan is often longer than the loan term. For example, a lender might make a commercial loan for seven years with a 30-year amortization period.

What is the minimum credit score for a commercial loan?

Most lenders need borrowers with a credit score of at least 660 to give them commercial real estate loans. Term loans, SBA loans, lines of credit, and portfolio loans are commercial real estate loans.

Is a commercial loan easier to get?

Private companies typically make these loans and require a larger down payment. Qualifying for the loan is more straightforward, and getting the loan is typically faster than with a standard mortgage.

What is the Interest Rate on a Commercial Loan?

The interest rate on a commercial real estate loan is usually between 2.2% and 18%. The interest rate you get depends on your loan type, how qualified you are as a borrower, and what kind of building or project you’re funding.

Conclusion

Now that you know how to get a business loan for real estate, what should you do next?
If you decide to apply, ensure you meet the requirements for getting a commercial real estate loan. Consider the fact that many lenders require a commercial property loan down payment.

Also, ensure that the length of time you have to pay back the loan doesn’t trap you in a never-ending cycle of debt and that the interest rate doesn’t throw off your debt ratio to income. For the best results, look into lenders and their financing options to see which can meet your real estate and business loan needs with the best terms.

References

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