If you’re considering owning property as an investment or want to buy property for business reasons, the chances are pretty good that you might not have the money just lying around for that purpose. Because of this, you’ll likely need a commercial real estate loan to buy, build, or refinance a commercial property or properties.
Defining Commercial Real Estate
Before providing information on how to get a commercial real estate loan, it’s a good idea to understand the basics of commercial property. The word “commercial” is a clue, but if you google the term “commercial real estate” or “commercial property,” you’ll find different definitions.
To put it simply, commercial real estate (CRE) refers to any:
- Income-producing property (property used strictly for investment purposes)
- Property used in the service of a trade or business
- Property that isn’t used for personal or residential purposes
With the above in mind, the goal of a commercial real estate loan is to finance the construction, acquisition, or financing of commercial real estate.
CRE Loans versus Residential Real Estate Loans
CRE loans differ from home mortgages in the following ways:
|
Commercial Real Estate Loans |
Residential Real Estate Loans |
Purpose |
Finances real estate used for business or investment purposes |
Finances real estate used for residential purposes |
Borrower Type |
Business entities (corporations, limited partnerships, funds) |
Individual or joint tenants (spouses or other family members) |
Financing Sources |
Traditional lenders (banks or credit unions), life insurance companies, pension funds or private debt funds, U.S. Small Business Administration |
Banks, credit unions, or accredited online lending sources |
Loan Term |
Short-term, generally no longer than 10 years; amortization can be longer than the actual loan term |
Long-term, generally 15 to 30 years; amortized for the same period |
Qualifications |
Property performance, business/ personal credit history and/or borrower income |
Borrower’s income, employment history, and credit history |
Credit Score Requirements |
Minimum 660 |
Minimum 620, though can be lower for FHA or VA loans |
Down Payment |
At least 20%, depending on financing type |
As low as 3%, depending on financing type |
General Steps for Obtaining a CRE Loan
If you’ve decided that a commercial real estate loan is necessary for your purposes, follow these steps:
Decide on the best loan. Figure out if you need an acquisition, construction, or refinance loan. Also determine the purpose of the debt, the amount of collateral to put up, length of the loan, and how much you need to borrow.
Find the right lender. Not all commercial lenders are created equal. Do your research to find out lender specialties, interest rates, fees, and other information.
Prepare the paperwork. As part of your loan application, the lender will need to know about the property, including its use, age, income flow, and market dynamics. You’ll also need to provide information about your financial and business backgrounds. These can include credit history, annual revenue, coverage ratio and debt-to-income ratio.
Close the loan. If the lender approves and underwrites your application, you’ll schedule a closing date during which you’ll offer your down payment and pay other related costs.
The procedure involved with applying for and obtaining a commercial real estate loan differs from that of getting a home mortgage. Before beginning the process, spend some time determining the purpose of the loan and pinpointing the right lender. Performing due diligence ahead of time can help ensure you obtain the right CRE financing for your purposes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.