Do you need a commercial real estate loan? If you have never gone through the process before, you probably have some questions such as what commercial lenders look for in an application, and more. Do not worry. We have answers for you.
What is a Commercial Real Estate Loan?
A commercial real estate loan is a mortgage, or loan, placed on a property that is used for business purposes. Commercial real estate (CRE) is any property used for business purposes. Examples include retail stores, gas stations, warehouses, multifamily apartment units, office buildings, and the like.
Who Needs a Commercial Real Estate Loan?
Corporations, developers, LLCs, small businesses, sole proprietorships, and even funds and trusts can have reason to apply for a commercial loan. If you are a business owner, you might need to buy or renovate a property so a CRE loan will help you secure or design the office space or building you have always wanted. A Commercial Real Estate Loan can be used to buy a new property, renovate an existing one, or refinance debt on your existing commercial property.
Commercial Real Estate Loan Terms
In general, commercial property loan terms run 5 to 20 years, and they typically have a loan-to-value ratio — which is an equation that compares the amount of the loan to the property’s appraisal — of 65 to 80 percent. CRE loans are available for many different types of commercial real estate and are designed to assist business owners in financing the purchase or renovation of the property that will be used for the business. The property itself is used as collateral to secure the loan.
Types of Commercial Real Estate Loan Options
There are many types of commercial real estate loans, including:
- Standard Commercial Mortgage or Bank Term Loan - A traditional commercial real estate loan is issued by a financial institution and has a long-term repayment plan with fixed-rate or variable-rate interest. This type of loan is advantageous for borrowers who already have a banking relationship and a good personal credit score of at least 700.
- SBA 504 Loan - These types of loans are for small business owner-occupied properties and require a 10% down payment. This type of small business loan is not to be confused with an SBA 7 loan, which business owners can use to either buy a business or gain access to working capital.
- Portfolio Loan - A commercial portfolio loan is one that is held by the lender rather than sold on the secondary mortgage market. It is most often used by borrowers with bad credit, tax liens, or excessive debt, who would struggle to get a more conventional loan.
Commercial Real Estate Loan Eligibility
Qualifying for a commercial real estate loan depends largely on the type of loan you are trying to get, but a few preliminary steps will improve your chances. Here is how to prepare to secure your loan.
1. Gather the Documents You’ll Need
Gather together all the documents you will likely need to qualify for a commercial real estate loan: business and personal tax returns, bank statements, personal identification, etc. And also make sure you know your credit score.
2. Know Why You Need the Loan
This may seem like a no-brainer, but you need to know exactly what you are going to do with a real estate loan to secure business financing. Not only will knowing exactly why you need the loan guide you in the type of loan you need, but it will ensure you are ready to fill out the loan application and act to make the purchase you need.
3. Choose the Type of Loan You Want
Choosing your real estate loan type depends on a number of factors: your personal creditworthiness, your cash flow, annual revenue, how much cash you have for a down payment, your debt-service-coverage ratio (DSCR) which is your operating income divided by your debt service, i.e. your loan payment and interest, plus any other debt you are carrying.
4. Choose your Lender
This will depend on the type of real estate loan you want but always go with a trustworthy lender. Be sure to do your research before taking the next step. TDECU has been in business since 1955. We are the largest credit union in the Houston area and we offer many loan options with great terms and rates. Contact Business Services to discover how we can help you and your business grow.
5. Fill Out the Application
Once you know the type of loan you need and you have chosen your lender, it is time to fill out the application. This can be a long and daunting process, so be sure to reach out to your accountant or financial advisor along the way. Many lenders, like TDECU, will also help borrowers with the application process. In fact, this assistance should probably factor into your lender choice.
Apply for a Commercial Real Estate Loan Today
Applying for commercial real estate financing can feel overwhelming but it is worth it since commercial real estate loans can provide life-changing business transformations. TDECU offers business loans to qualifying borrowers. Reach out today to learn about loan products, including a wide range of business loan solutions we have for you and your needs.