Qualifications for a Commercial Mortgage
When applying for a commercial mortgage on a real estate investment property there are a few things to know about how lenders consider their ideal applicant. Most Commercial lenders focus more of their attention on the asset itself and the experience of the applicant when approving them. Commercial finance is structured more about the performance of the asset and the debt service coverage ratio of the property rather than the credit worthiness of the borrower. Although the credit worthiness is a factor, majority of the attention is on the operator’s experience, rather than their job history or credit score. Properties that are income producing already and have leases in place make the application look stronger.
Some commercial lenders offer attractive loan products that are geared more towards landlords specifically. If an operator is strong on paper with good financials and experience, some lenders will offer a “blanket loan”. Blanket loans are loans made by taking multiple smaller loans and consolidating the assets into one commercial “blanket loan”. This is usually beneficial to borrowers who have many properties in their personal name and want to remove them so they can go out and buy more properties in their personal name.
Appraisal valuations are done a little differently with Commercial loans than Residential loans. Residential loans are usually valued based on one approach only, which is the Sales Approach. The Sales Approach is a valuation method that uses comparable sales in the area, typically within a 1 mile radius, and gives the subject property a value based on a price per square foot basis. The problem lies that if the homes being used as comparables are not comparable to the subject property you have skewed valuations. What is nice about commercial loans is that they factor in the Replacement Cost approach and the Income approach as well. Using these three methods the valuation of the asset is more accurate.
Timelines for Commercial Loans
The loan process is a little longer for commercial loans than residential loans. The typical loan takes 45 days and could be longer depending on the size and complexity of the loan itself. Generally the loan is applied for and reviewed and subsequently the lender does a site visit, reviews financials of the asset or portfolio and also does an appraisal.
Days 1-10: Mortgage application submitted and reviewed
Days 11-20: Financial documentation of collateral reviewed by lender
Days 21-30: Site visit and any field studies completed by lender
Days 31-40: Appraisal completed and reviewed by lender
Days 41-45: Scheduling Closing and coordinating insurance