Need a commercial mortgage to purchase or refinance commercial real estate? The task can be challenging if you need a small loan amount.
Traditional lenders overlook smaller loans in favor of higher-balance transactions exceeding $5 million. This leaves many borrowers pushed to the side.
Enter small-balance commercial loans.
These innovative loans are for transactions less than $5 million in size.
Creative and flexible small-balance commercial loans are designed for borrowers who are overlooked by traditional lenders.
This article will introduce you to the basics of small-balance commercial lending, the super creative programs, and the flexible requirements. For additional options, you can also read about these other types of commercial real estate loans.
A small-balance commercial loan is specifically designed for smaller commercial real estate purchases or refinances. The loan amount generally ranges from $500,000 to $2.5 million but can go as low as $200,000 or as high as $5 million depending on the lender and your creditworthiness.
Compared to mortgages offered by traditional lenders, small-balance loans are more flexible and come with less rigorous underwriting requirements. The approval process is streamlined, with a variety of programs specifically designed to address the common limitations faced by most borrowers.
Small-balance loans can finance all commercial property types, from the low-risk traditional ones such as offices, warehouses, and multi-family to higher-risk properties that are typically rejected by traditional lenders.
Whether the subject property is owner-occupied or an investment property, there is virtually no limit to the different commercial real estate types covered by small-balance loans.
Eligible properties include but are not limited to:
Multi-family (5 units or more)
Mixed-use
Office buildings
Retail
Light industrial
Self-storage and warehouse
Medical
Hotels and motels
Mobile home parks
Vacant land zoned commercial
Special-purpose properties such as:
Religious places of worship;
Spaces for marijuana-related transactions;
Gas stations and convenience stores;
Automotive shops;
Elderly care facilities (assisted living facilities (ALFs)); and
Restaurants.
All commercial real estate is eligible for small-balance loans.
While everyone can apply for small-balance loans, this type of financing is ideal for those who:
Were previously rejected by traditional lenders due to the small loan amount and/or poor credit;
Do not have a consistent income reflected in their tax returns;
Require significant cash out from their equity; or
Need a longer-term loan at a fixed rate.
Some lenders even allow non-U.S. citizens to apply, including foreign nationals.
Be sure to check out our guide on how to get a commercial real estate loan, which lays out the 6 steps of the application process.
Curious to explore your financing options for your commercial real estate project?
The benefits of a small-balance commercial loan include less paperwork, flexible underwriting guidelines, and a quick closing. Other advantages include low credit score requirements, wide range of property types, and no need to provide tax returns. Small-balance loans are particularly well suited for borrowers who were turned down by banks.
Unlike the complicated application and closing process of large-balance commercial lenders like banks, small-balance lenders offer a simplified process that makes the approval process much easier.
To qualify for some small-balance commercial real estate loans, you don’t have to provide tax returns, bank statements, or operating statements. For example, the submission process can be as simple as providing just a loan application and a credit report.
This gets you to the closing table faster.
Turned down for a commercial loan already? Compared to traditional lenders, small-balance lenders have higher risk appetites and offer flexible, creative, and strategic financial solutions.
For example, we helped an auto body repair shop that was previously turned down four times due to poor credit issues, an IRS tax lien, and environmental risks (due to the chemicals used in its day-to-day operations).
We found a small-balance lender that was able to provide a $619,000 purchase loan to allow the company to purchase the building it had been renting.
While residential loans are generally limited to 1 to 4-unit properties, small-balance commercial loans can be used for nearly every commercial property type, making them a highly flexible financing solution.
Therefore, with a small-balance CRE loan, you can diversify your real estate holdings across multiple asset types, from multi-family to mixed-use properties. Or, use a small-balance commercial loan to do a cash-out refinance and tap into the equity of your current commercial real estate holdings.
Borrowers applying for small-balance commercial real estate loans can enjoy flexible documentary requirements.
In a nutshell, these programs are designed based on the level of documentation most business owners or investors can comply with – from full documentation to no documentation at all.
Borrowers have the freedom to choose which program fits their situation best and which offers the best value in exchange for some leniency.
Following are the creative and flexible small-balance loan options that you can choose from:
No documentation
Bank statement
Light documentation
Full documentation
These programs are available whatever your goal is, whether you want to purchase, do a cash-out refinance, or do a rate-and-term refinance.
To help choose the small-balance loan that is right for you, the below table summarizes the different program types.
No Documentation | Bank Statement | Light Documentation | Full Documentation | |
|---|---|---|---|---|
Loan size | $200,000 to $5 million | $200,000 to $5 million | $200,000 to $5 million | $200,000 to $5 million |
Purpose | Purchase, rate-and term refinance, cash-out refinance | Purchase, rate-and term refinance, cash-out refinance | Purchase, rate-and term refinance, cash-out refinance | Purchase, rate-and term refinance, cash-out refinance |
Term | 5-year ARM or 30-year fixed | 5-year ARM or 30-year fixed | 5-year ARM or 30-year fixed | 5-year ARM or 30-year fixed |
Maximum LTV | 75% (purchase, rate-and-term); 70% (cash-out) | 80% | 80% | 80% |
Minimum credit score | 700 | 650 | 650 | 650 |
Minimum DSCR | N/A | 1.0x | 1.0x | 1.15x |
Documentation | N/A | 12-24 months bank statements | Operating statement, rent rolls, CPA letter, etc. | Two years of personal and business tax returns, operating statement, etc. |
The No Doc program is exactly what it sounds like it is. You do not have to provide any documentation to verify your income.
Another key feature of this program is that there is no minimum debt service coverage ratio (DSCR) requirement.
This highly creative small-balance loan caters to:
People who cannot or prefer not to submit income verification documents for varying reasons;
Self-employed professionals or real estate investors whose tax returns do not reflect consistent or adequate income;
Borrowers who report lower income for tax purposes; or
Foreign nationals who do not wish to disclose any information regarding their cash flow.
Regardless of their reasons, this innovative program offers borrowers an alternative path to qualifying for commercial real estate loans.
Besides a loan application and a credit report, there’s not much else documentation required. You are not required to provide any tax returns, bank statements, or operating statements. Simply stated, there is no income verification required.
To make up for the higher risk associated with this program, small-balance lenders require a relatively higher credit score to gauge the borrowers’ creditworthiness, generally set at a minimum of 700.
Lenders also offer a lower maximum loan-to-value ratio of 75% to reduce the small-balance loan’s risks.
Here are sample No Doc program features at a glance:
Loan size: $200,000 to $5 million
Purpose: Purchase, cash-out refinance, and rate-and-term refinance
Term: 5-year adjustable-rate mortgage (ARM) or 30-year fixed
LTV: Purchase or rate-and-term refinance: 75%; cash-out refinance: 70%
Minimum credit score: 700
Minimum DSCR: None
Amortization: Up to 30 years
Even if you don’t meet those exact parameters, you may still qualify for the No Doc program. For example, some lenders accept applications with a minimum credit score of 650 instead of 700.
However, the tradeoff is that the no-DSCR feature only applies to a maximum loan amount of $750,000. Any loan beyond that limit would require a minimum DSCR, say 1.0x, for example. Learn more about our DSCR loan programs.
Also called the Lite Doc, this loan option requires more documents than the first two programs. However, unlike most traditional loans, Lite Doc still does not require you to submit tax returns, which is advantageous to borrowers who:
Cannot or opt not to disclose their business’s tax returns;
Own real estate properties that are more valuable than reflected in their tax returns; or
Incurred losses as shown in their tax returns.
Depending on the property to be financed and your unique situation, your lender may ask you to provide:
Operating statement and rent rolls, and other schedules, which may include debt, capital expenditures, and deferred maintenance.
CPA letter verifying your business income.
Here are sample Lite Doc program features at a glance:
Loan size: $200,000 to $5 million
Purpose: Purchase, cash-out refinance, and rate-and-term refinance
Term: 5-year adjustable-rate mortgage (ARM) or 30-year fixed
LTV: Up to 80%
Minimum credit score: 650
Minimum DSCR: 1.0x
Amortization: Up to 30 years
If you have complete documents, including tax returns, at hand, the Full Doc program is the way to go.
Compared to the other small-balance commercial loans, it comes with the best terms and interest rates because lenders face lower risks. Since this program requires complete documents, lenders have more accurate information to evaluate the borrowers’ repayment ability.
The Full Doc program is ideal for:
Borrowers who can provide full documentation of income (tax returns, paystubs, W2s, etc.)
Creditworthy investors and business owners known as “near misses” or “bank turndowns” who just fell short of bank guidelines. For additional mortgage options, check out our business mortgage application denied guide.
As its name implies, to qualify for this program, you must submit full documentation to verify your income:
Two years of personal and business tax returns;
Operating statement;
Profit and loss statement (P&L); and
Personal financial statement.
Here are sample Full Doc loan terms at a glance:
Loan size: $200,000 to $5 million
Purpose: Purchase, cash-out refinance, and rate-and-term refinance
Term: 5-year adjustable-rate mortgage (ARM) or 30-year fixed
LTV: Up to 80%
Minimum credit score: 650
Minimum DSCR: 1.15x
Amortization: Up to 30 years
Need a small-balance loan for a multifamily property and have the ability to fully document your income?
Consider applying for a Fannie Mae or Freddie Mac Multifamily Small Loan.
Recognizing the growing popularity of the multifamily market among business owners and investors, and the importance of smaller rental properties in the U.S. housing market, these two enterprises offer small-balance loans up to $7.5 million.
If your commercial real estate transaction falls below the minimum loan amount required by traditional lenders, you need a small-balance loan.
How do you find small-balance loans and small-balance commercial lenders?
Most small-balance commercial mortgage lenders only work through mortgage brokers, not directly with the borrower.
Therefore, contact a mortgage broker who can recommend the best loan options for your specific needs and guide you through every step of the way. By doing so, you can focus your attention, time, and resources on more important things like managing your business or planning for your upcoming investment.
In the world of commercial real estate financing, small-balance commercial loans play an important role by serving a specific segment of borrowers.
If you need a loan size of less than $5 million, a small-balance commercial lender has flexible options to give you the opportunity to purchase or refinance your dream commercial property.
Depending on your circumstances and preferences, you have several small-balance programs to choose from:
No documentation
Bank statement
Light documentation
Full documentation
If you have the ability to show adequate income through tax returns, you can opt for the full documentation program to enjoy the best loan terms.
Or you can apply for a loan without providing any proof of income and still receive favorable terms.
Contact us today to learn how a small-balance commercial mortgage can be the perfect solution to achieving your next commercial real estate purchase or refinancing project.
From no doc to full doc, we’ll find the right path for you.
