Applying for Commercial Real Estate Loans

In order to consider your business as a credit risk, lenders for commercial mortgages will be conducting a thorough analysis of your business’s financial health. In this process, you will be required to provide bank statements, balance sheets, income and expense report, tax forms and many more. You may also be asked to provide your personal financial records however it is not usually a part of the evaluation.

To calculate your debt service coverage ratio, these documents will be considered. DSCR is the ration of your net income to your monthly mortgage payments. A DSCR of at least 1.25 should be demonstrated, which means that your incomes should exceed the expected payments by 25% so that you will get the best rates.

Commercial mortgages are far different from residential mortgages. In commercial mortgages, you will not be able to get the entire purchase price of the property. Commercial real estate loans usually require down payments. The LTV ratio (Loan to value) is the ratio of what you borrow to the value of the property, the lower the LTV the higher the possibility for you to get on your mortgage. A lot of lenders cap the LTV at 75% and you’ll get better rates at an LTV of 50% or 60%

Factors such as the type of loan that you are applying for can impact your chances of being approved, even if you meet the basic LTV and DSCR ratios. It can be difficult if you do not have any previous experience managing commercial properties and you are going to buy a property with intent to lease it. If you are going to buy a property that currently has tenants, future rental income will not be used as a part of your application.

It may be also difficult for restaurants and nightclubs to secure a commercial real estate loan because of the high rate of failure in new locations. It is unlikely to individuals who are just starting out to get a commercial mortgage no matter what their business plan is or their financial situation. One of the reason why is because businesses without proven track record are considered as very poor risk by a lot of lenders.