What is the difference between a commercial mortgage and a residential mortgage?
A residential mortgage only applies to residential property (no greater than four units per building). A commercial mortgage is utilized to secure financing for a larger spectrum of properties. A residential loan process is standardized by established guidelines, but the commercial loan varies depending on individual lenders.
How much equity do I need to be approved for a commercial mortgage?
Usually, the magical number is 20% minimum equity in the property. This relates to a loan to value that is no higher than 80%. There are some exceptions that apply (two properties can be cross-collateralized).
How long does the loan process take?
Usually, residential mortgages take about 45 days to close while the more involved commercial process takes around 60 days from beginning to end.
What type of information do I need to provide to contribute to a smooth process?
All lenders will want to see:
- Three years of individual and business tax returns
- Statements that detail improvements or expenses incurred by the property
- A current rent roll of any apartment building
- Personal financial statements for all partners
Is debt service coverage important in getting approved for a commercial loan?
Yes, debt service coverage is one of the key factors contributing to whether a commercial loan is approved.
Will I incur a penalty if I pay off the loan before the end of the term?
Most commercial loans do have a “pre-pay penalty.” This penalty is instilled if a loan is paid in full or prior to the outlined terms. Commercial loans carry a prepayment penalty for four of the first five years.
Why should I use a mortgage broker?
A broker can aid you in understanding the transient nature of the mortgage market. The broker’s fee will be more than made up in the insight they can provide in steering you away from mistakes. Since they work with mortgages on a regular basis, they will be able to offer their expertise and better be able to explain the numbers.
How can I make the closing process go more smoothly?
Use the time between accepting a lender’s offer and receiving the commitment to your advantage by tackling as many obstacles as possible:
- Once you have accepted the offer, order the title searches.
- Find out the lender’s requirements for the ALTA survey (this process could take up to 4-6 weeks, so do not sleep on the process.
- Make sure you have a long-term sense of what you will do with the property.
All professionals will say to move as many things into the “completed” list from the “to do” list. Some processes are very time consuming and should be immediately addressed.
Suggestions:
- Do not focus on the absolute bottom when choosing an interest rate. Focus on the monthly/annual payment being in your range.
- Stick with one broker. Do not work with multiple brokers.
- Address any issues (tax escrows, lender’s calculation method, timing, etc.) before you make your initial deposit.
- When it is time to refinance, consider using a different lender or at least find out what they can do for you. The nature of the industry is not static, so it is always good practice to see what others have to offer from time to time.
