How to Get a Commercial Real Estate Loan and Other Top Questions: Your One-Stop Resource

By: Zack North

Have commercial mortgage loans on your mind? You’re not alone.  Investors and business owners across the country are looking to purchase real estate or refinance the properties they currently own, and new financing options continue to pop up hoping to meet the demand. But the fact that there are a greater number of commercial lenders in the market today offering a wider variety of loan programs doesn’t necessarily make the process easier for prospective borrowers.

In fact, the sheer number of options available can make the commercial mortgage process downright intimidating.

It’s natural to have questions – regardless of whether you’re a first-time borrower or a seasoned investor.

The good news is that we at Commercial Direct work with all types of investors and business owners and we’ve received nearly every inquiry in the book.  The truth is that some are asked far more often than others.

Read on to see some of the most common commercial mortgage questions – as well as our answers.  Hopefully, this information can save you time and help you get the information you need to make the best decision for your loan.

 

  • What type of loan should I get for my property?

 

The best type of loan for you depends on a number of factors, including your credit history, property type, timeframe, and overarching financial goals.

Since the lenders with the lowest interest rates and most attractive options often have the most stringent approval processes, it’s important to first understand the type of loan you can get.

Bank and SBA loans can be the first stop on your search for financing, but you may also need to research alternative options at the same time.  That’s because a high percentage of prospective borrowers simply fail to qualify for bank or SBA loans.

Transaction length and documentation requirements can also turn borrowers away from these more traditional loan options.

Once you have a good sense of your credit-worthiness and feel confident about your ability to get approved, consider your long- and short-term plans for the commercial property.

Are you looking to flip the property as soon as you can and turn a quick profit, or are you hoping to be an owner for the next 30 years?  This decision will make a big difference in the type of terms you should look for, especially when it comes to rate buydowns and prepayment penalties.

In short, the best loan type for you will be the one that gives you the most control as you work to accomplish your investment or business goals.

 

  • How long does the commercial loan transaction process take?

 

Commercial loan transactions take longer than their residential counterparts because the real estate involved is generally far more complex.

Since offices, apartment buildings, warehouses, and restaurants are all so different from one another, lenders must take their time underwriting each particular transaction.

That being said, some types of lenders take longer to provide funding than others.

This often comes down to a particular lender’s operational process and the number of people required to approve or deny a loan request.

For example, it is common for traditional banks to have a loan committee that determines whether or not to fund each request.  This can lead to a transaction length of several months, and that could spell doom for a time-sensitive opportunity.

On the other hand, alternative lenders are typically able to fund commercial loans in around 35-45 days.  Hard money lenders can move even faster, but that speed is usually paired with a higher interest rate.

 

  • What documentation is required?

 

The amount of documentation required to secure commercial financing is ultimately up to you.  That’s because alternative lenders in today’s market offer a variety of reduced documentation programs that help you get approved for financing without having to provide documentation like tax returns.

These reduced documentation solutions typically include higher interest rate payments.  But many prospective borrowers – especially investors and self-employed professionals who often struggle to produce documentation that accurately reflects their income – are more than willing to make that trade.

The documents below are typically required at the start of a commercial loan transaction:

  • Completed loan application
  • Rent roll form (for properties with multiple tenants)
  • Operating statement

It also helps to have the following pieces ready as well:

  • Property photos
  • Insurance agent contact info
  • Previous title policy
  • Property manager contact info
  • Schedule of recent property improvements
  • A valid purchase & sales agreement

It may take some time to get the documentation you need in place – just keep in mind that the more information you can provide at the beginning of the transaction, the fewer delays you can expect throughout the rest of the process.

 

  • What happens if a bank turns me down?

 

Bank turndowns are quite common in the commercial real estate industry.  The good news is that many alternative solutions exist in today’s market.  The key is to understand why your request was denied and then search for loan programs that offer more flexibility.

The amount of alternatives available to you will depend on the original reason for your bank denial.

For instance, if a bank said no simply because the requested loan amount is too small, you could quickly find a large number of non-bank options that would be happy to accommodate you.

But if a bank turned down your request because the property is located in too rural of a location, or the number of vacancies in the property was too high, it could prove more difficult to find success with a non-bank lender.

Either way, be sure to get as much information from the bank as possible so you know what you need to look for when researching alternative solutions.

 

  • Why should I consider non-bank lender if their rates are higher?

 

The answer to this question can be summed up in one word: flexibility.

Here are a few common situations that call for more flexibility than banks are typically able to provide:

  • An investor wants to get a loan but is unable to document their income on tax returns
  • The commercial property in question has only been stabilized within the past 2 years
  • A property owner is looking to refinance just a few months after their initial purchase
  • An investor wants to secure financing for an out-of-state purchase

Those are just a few of the reasons why prospective borrowers reach out to Commercial Direct for financing solutions.

While our interest rates are slightly higher than what a local bank may offer, our loan programs give you more opportunities to qualify and get the loan you need – fast.

 

  • How much can I borrow?

 

The answer to this question depends on the type of lender you choose, the commercial property in question, and your credit history.

That being said, most lenders clearly state their loan range on their website.  As an example, Commercial Direct offers loans between $250,000 and $2 million – that makes us a great fit for investors and business owners with smaller loan requests.

 

  • Does it make sense to buy down my interest rate when securing a loan?

 

A “buydown” occurs when you pay more up front in order to lock in a lower interest rate throughout the life of the loan.

Your decision to either buy down your interest rate or leave it as is should come down to your current financial strategy and long-term goals.

If you plan to sell your commercial property before the completion of the loan’s term, a buydown at the beginning could end up costing you more than if you had just made regular payments each month.

On the other hand, it could be a good idea to buy down your interest rate if your business or investments are currently generating a high level of income and you can afford a more substantial initial payment.

So when is it a good time to consider an interest rate buydown?  Consider this option if you plan to hold on to a commercial property for many years or if your current financial situation gives you an opportunity to pay more now in exchange for lower payments throughout the life of the loan.

 

  • What steps should I take to get started?

 

If your goal is to get approved for a commercial loan quickly and without any headaches, your first steps should involve communication and planning.

Communication:

Reach out to each of your lender options and simply talk about your loan request.  The story here is crucial.

Be sure to clearly describe the commercial property, your background, and the reasons why you need a loan.  The more descriptive you can be here, the more helpful the lender can be when discussing your chances for approval.

But you should also take this time to ask plenty of questions.  Press the lenders to give you a detailed description of their transaction process, documentation requirements, and any information they can share regarding their certainty of execution.

In other words, do your best to get a sense of how confident they are in their ability to get you the funding you need.

Planning:

Creating a strategy can go a long way toward getting your loan approved.  Lenders want to know how you plan to use the funds and how you plan to pay off the loan.

Drafting a solid business plan will come in handy during the loan application process.  And writing your goals down may give you additional insight into the type of loan you want to secure.

Have a question we didn’t cover here?

If you’re interested in seeing how we can help you with your purchase or refinance, or you have any other question about our programs or commercial lending in general, simply visit our Get Started page and take the first step today.

Author: Zack North

Zack North is the Director of Marketing for Commercial Direct.  As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.

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