You’ve found the perfect commercial property. It’s the right location, the ideal size, and the numbers make sense. You are already envisioning your returns when you run into a problem — your lender does not see this investment like you do. He’s questioning the property, the paperwork, and even you! Here are the top 5 commercial mortgage challenges and some key tips to overcome them.
1: Property Challenges
Every commercial property is unique and that complicates the underwriting process for lenders. While two houses in a neighborhood usually have a lot in common, two retail properties on the same street may look nothing alike.
The best way to anticipate and overcome any potential difficulties with your commercial property is to familiarize yourself with the lenders you are considering.
By looking at a list of recently approved loans, you’ll get a better idea of what types of properties that lender favors. You can quickly learn which lenders are attracted to your property type and location and which are not.
You’ll also learn where certain flexibilities exist. For instance, Commercial Direct, a division of Silver Hill Funding, LLC (the lender), may only grant a loan on a multifamily property if it contains 5 or more units. However, we do have the ability to approve loans on duplexes, triplexes, and 4-plexes – provided the total number of units is 5 or greater. So a transaction involving three duplexes could be classified as a six-unit commercial multifamily building and fit Commercial Direct’s guidelines.
Banks and other traditional options may not be so flexible – so you can save time by understanding a lender’s “box” before you even begin the application process.
2. Documentation Challenges
Borrowers are frequently overwhelmed by the amount of documentation required by commercial lenders during the application and underwriting processes. Tax returns and 4506Ts can present special challenges. The good news is, you do have a say in how much paperwork you wish to submit, as long as you work with the right type of lender.
For many small business owners and those who are self-employed, tax returns may not be a true reflection of income or the ability to repay a mortgage. If you find yourself in this camp, it may be best to work with a non-bank lender that offers light doc or stated income solutions. You may need to pay a slightly higher interest rate, but you can feel more confident about getting your loan.
3. Credit Blemishes
Bankruptcies and other credit problems are unfortunately quite common for small businesses and investors. Just one of these issues can prevent an otherwise creditworthy borrower from securing the mortgage he or she needs.
Credit challenges can certainly make it difficult to get a commercial mortgage – but solutions do exist. If you have a blemished credit history, make an effort to talk to a lender’s representative and actually tell your story. Mortgage professionals want to listen because they often have a program or option that can help you get funded.
Even if they can’t meet your needs, they may be able to refer you to a more flexible lender who can.
4. Transaction Length
Commercial mortgage loans have a complex underwriting process that can take months to complete. This presents a serious challenge for borrowers who are rushing to close on a purchase before a property goes back on the market or those who need to refinance before a looming balloon payment.
There are steps you can take to expedite the process, but transaction length really depends on the size of the loan and the lender. Naturally, a transaction involving an average 5-unit multifamily property is going to close much faster than one involving a more complex automotive structure with environmental issues. A bank loan will typically involve a lending committee that can take weeks to look over these more complicated deals. On the other hand, non-bank lenders like Commercial Direct will work individually with you to skip this step and get you a decision much faster.
5. Communication Breakdowns
The biggest challenge for commercial mortgage lending may be the oldest one in the book – communication. Even smaller transactions feature many moving parts and any communication delay or breakdown between lender and borrower can bury a transaction before it even begins.
There is no secret to overcoming this challenge. You simply need to over-communicate with a lender’s representative. A good first step may be to ask for a schedule or timeline that covers the entire transaction process. That makes it easier to stay on top of a lender when delays start to occur.
It is also important to be as upfront as possible when communicating with a lender. Today’s lenders have skilled underwriting teams that can quickly tell if your property isn’t all that you say it is. You’ll have a better chance of getting funded if you clearly communicate the strengths and weaknesses of the property.
Great communication may not always expedite the process, but a breakdown can easily end any hope for a successful transaction.
Challenges are a natural part of any commercial mortgage loan process. If you can begin to anticipate the top 5 mentioned here, you’ll have a better chance of overcoming obstacles and securing the funding you need.
Partnering with Commercial Direct
Commercial Direct is a division of Silver Hill Funding, LLC, a non-bank lender offering competitive pricing and flexible terms on loans from $250,000 to $2 million. Our team has closed and funded more than 20,000 small commercial loans, and we specialize in working with business owners and investors to help them get the funding they need — fast and hassle-free.
Are you ready to build a commercial mortgage that fits your needs? Partner with Commercial Direct by applying online today and telling us your story.