What do banks look for when approving a commercial loan?
Knowing the answer to this question can improve your chances of securing a commercial mortgage from your local bank.
Understanding the way banks think can also help you recognize instances where a bank may not be your best bet for obtaining a commercial loan.
Here are 5 things banks will look for when qualifying your loan request. You’ll also find a few non-bank alternatives in case you fall short of certain bank requirements.
Let’s start with one of the basics. A prospective borrower’s credit score will have large impact on a bank’s decision to approve or deny a commercial loan request.
Every financial institution is different, but you can expect a bank’s minimum credit score requirement to be between 680 and 700.
If you know your credit score falls on the lower end of that spectrum, you have 2 options:
It’s certainly possible to improve your credit score – it’s just not something you can accomplish overnight.
Making your monthly payments on time and paying down bills and debts as soon as possible will help raise your score in the long term. But you may achieve your financial goals faster by identifying alternative lending options that are willing to work with you right now.
Many borrowers today choose to take out a loan with one of these more flexible lenders and then refinance with a bank loan once the opportunity arises. That way, they’re able to keep their business or investment strategy moving forward while they work to improve their credit profile.
It takes underwriters, closers, processors, and transaction managers the same amount of time to close a $150,000 loan as it does to close a $1.5 million loan. Larger, name-brand institutions that receive a large number of financing requests may simply choose to focus on the bigger loans that allow them to generate greater revenue.
This tactic makes sense, but it certainly doesn’t do any favors for small business owners and investors who regularly require smaller loans.
In the small-balance commercial mortgage space, where loans are typically anywhere between $100,000 and $5 million, alternative lenders work to meet the needs of prospective borrowers with financing requests on the lower end of the spectrum.
Traditional bank lenders are known for offering the lowest rates and most favorable terms. They’re also known for requiring extensive documentation to verify income.
While it’s a fair trade-off, this aspect of bank lending prevents a large number of prospective borrowers from obtaining the financing they need.
That’s because documentation like tax returns, leases, and historical operating statements don’t always tell the full story for investors and self-employed business owners.
Those who are unable – or unwilling – to provide tax returns may look instead to non-bank lenders that offer either alternative or reduced documentation loans.
In exchange for a higher monthly interest rate, these lenders may make it possible for borrowers to submit business bank statements in lieu of tax returns. Others simply remove the income verification requirement altogether.
It should be noted that borrowers who have the ability to submit documentation often find it in their best interest to do so. Lenders are more likely to offer their lowest rates when they feel more confident about a borrower’s business and repayment strategy.
Investors looking to finance a new restaurant or bar property often have difficulty working with their local bank. The reason for this may have little to do with the borrower’s eligibility or business acumen.
The problem is that certain property types are simply considered to be more risky from a lender’s perspective.
Some properties, like restaurants, cause concern because of their high turnover rate. Others, like gas stations and other automotive properties, can create environmental issues that negatively impact the quality and usability of the real estate.
On the other hand, box-shaped buildings like multifamily, mixed-use, office, and retail properties that rarely generate these types of concerns are widely considered to be eligible for financing.
You can visit a bank’s website or contact one of their loan officers to get a full list of their eligible property types. Taking this step can save you time when it comes to filling out loan applications down the road.
Traditional lenders want to see that a commercial property is stabilized before they approve a loan – that is, they want to see that it is occupied and generating consistent revenue.
Financial institutions across the spectrum, from banks to hard money lenders, focus on property stabilization as part of their underwriting process. The difference is that banks will typically have a more substantial stabilization requirement.
In a way, lenders also seek to determine the “stabilization” of prospective borrowers.
Do they have a history of real estate investing? Have they declared bankruptcy within the past 5 years? Underwriters will work to answer as many questions as it takes for them to feel confident about a borrower’s ability to repay their loan.
If you’re the owner of a struggling business or you’ve recently overcome personal credit issues, you may not appear “stabilized” enough for certain traditional lenders. But again, alternative options do exist in today’s market.
Sometimes it’s not enough to have a general idea of what lenders look for when qualifying a commercial loan. If you want detailed information, you’ll likely need to contact a representative and detail your financing request.
During this conversation, you may find that your needs may not be a perfect match for the lender’s requirements. This is OK!
The process will give you a clearer view of the lender’s commercial loan underwriting requirements. And any feedback from a bank loan officer regarding your specific scenario is valuable as well.
If you have been turned down by a traditional lender – or you’d simply like more flexibility than they are willing to offer – Commercial Direct, a division of Silver Hill Funding, LLC, may be the perfect alternative for your needs.
Our team offers a wide range competitively-priced, reduced documentation loan solutions for investor and owner-occupied transactions. Every day we work with borrowers who have been turned down by traditional lenders, so we know what you’re going through and we know how to help.
Contact one of our loan officers today and tell them exactly what you’re looking for – ultimately, that’s what matters most.
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