A commercial real estate loan may benefit small businesses looking to expand their employment site or commercial real estate investors who purchase revenue-producing properties.
A loan note also called a mortgage note or promissory note is like a more sophisticated form of an IOU. With a loan note, the lender receives payments from a borrower over some time up to the date on which the loan must be paid in full.
You can get a BRT loan from banks, insurance companies, independent lenders, private investors, and even though the U.S. Small Businesses Administration's 504 loan program. However, because of money and responsibility, commercial home loans are usually more costly than residential loans.
How to be eligible to get a loan note.
To obtain a commercial real estate loan, you usually require a credit score of at least 660 and place a minimum down payment of 25 percent of the purchase price of the property. A borrower must also use most of the assets on his account or as an income-generating investment and use the assets as collateral.
What is the loan period?
CRE loans are generally shorter than home loan options, with maturities ranging from 5 to 20 years. As well, the amortization period (the process of repayment of the loan through payment facilities) is often longer than the loan itself. For instance, if you have a 10-year mortgage and a 30-year amortization period, you will make monthly payments for 10 years.
Lenders consider the monthly repayment of the loan within 30 years, with the final charge consisting of the remaining balance, known as the "ball payout."
Loan Notes/Information Ratio.
When you apply for a loan grade, lenders examine the borrower's credit history and creditworthiness.
This includes the presentation of financial statements, tax returns, and financial ratios over three to five years. Commercial lenders use three broad ratios to make decisions about whether to approve a commercial loan application.
These ratios include the loan-to-value ratio (LTV), the debt service coverage ratio (DSCR), and the debt ratio
Loan-to-value ratio (LTV)
Your loan-to-value ratio corresponds to your business mortgage divided by the market value of the property. Loan-to-value ratios for CRE loans are typically capped at a maximum of 75%. A borrower with a high loan-to-value relationship is considered higher risk because the borrower has less "skin in the game" or less personal funds invested in ownership.
Debt-service coverage ratio (DSCR)
The debt service coverage ratio is the net operating profit (NOI) ratio divided by annual debt service. DSC is a common method of determining whether a borrower has enough money to cover their debt. In general, the higher the ratio, the easier it becomes to obtain a loan.
The formula used to calculate your debt coverage ratio is as follows
DSCR = Net operating income/Debt Service
Debt Ratio(DR)
Some lenders can also calculate the personal debt ratio of a borrower when they purchase a commercial real estate loan.
There are two kinds of indebtedness ratios:
· A higher debt-to-equity ratio compares a borrower's first and second mortgage payments on a principal residence to gross earned income.
· The lower debt ratio compares a borrower's total mortgage payments and personal debt payments (such as automobile and school loans) with gross income. The justification for the debt ratio calculation is that if a borrower is over-leveraged with personal debt, the likelihood of potential default on a commercial loan may increase.
Secured vs. Unsecured Loans
The biggest difference between guaranteed and unsecured lending is you must provide a physical item of value for use as collateral if you are unable to repay the loan. You can borrow money without security using unsecured loans, but the lender must first review and approve your financial statements. You can borrow money without security using unsecured loans, but the lender must first review and approve your financial statements.
Secured loans
Most people offer home ownership as security when taking a guaranteed loan. In some cases, a lender may also demand that a borrower guarantee a loan with personal property.
Other security features you may provide include:
· Insurers such as life insurance
· Real property, like a principal residence
· Bank accounts
· Stocks
· Bonds
· Vehicles
It is important to note that lenders may seize your property if you fail to repay your guaranteed loan. In addition to paying interest on the loan, you may have to pay certain charges when you take out a guaranteed loan.
Unsecured loans do not require collateral, but you will still have to pay interest and potential fees. However, because you don't offer valuables, your lender will take a close look at your credit score and payment history. Examples of non-guaranteed loans are credit cards, personal loans, and student loans. Interest Rate Interest rates for most business loans range between 3.5% and 20%.
There is a wide range as interest is dependent on a variety of factors such as property location, property type, borrower's financial history, financing ratio and debt service coverage ratio, and more.
Down Payment
One of the conditions for obtaining a commercial loan grade is to make a down payment. A deposit is generally at least 25% of the purchase price of the property, excluding closing costs. The deposit can increase or decrease depending on the funding and loan you are using.
The Bottom Line Commercial real estate lending helps finance property for many different purposes, that you were considering using as your own business, renovating the property, or purchasing it as an income-generating investment. While taking a CRE IO loan memo can be a long and sometimes risky process, it can be beneficial and even necessary for commercial real estate investment.
Be sure to choose a lender you have confidence in and are looking for a low commercial mortgage rate. Don't rush this process: the total amount of debt service will have a significant financial impact on your company and the ROI.
In previous post: "Common Commercial Real Estate Lease Clauses"