A lot of people are turning to commercial real estate investment as a proven alternative to other investment vehicles. This page is for people who are ready to purchase or refinance a commercial property and want to know how to get a commercial real estate loan from a bank or non-bank lender.
Whether you’re a first-time borrower or an experienced investor, read on to learn how to make the commercial real estate loan application process go as smoothly as possible.
A commercial real estate loan is a mortgage you obtain from a lender to purchase or refinance properties classified as commercial real estate, which serves as collateral for the loan. The major types of commercial real estate (CRE) include multi-family, office buildings, mixed-use, retail, industrial, and special-purpose.
Therefore, the key factor dictating what is CRE lending is whether the property at issue is classified as commercial. In contrast, if you need a mortgage to purchase or refinance a residential property (e.g., single-family home, condominium, duplex, triplex, or quad), then you need a residential loan instead.
How do commercial mortgages work? Very much the same way residential mortgages work. You receive money from the lender, and you pay back the total borrowed, with added interest, over a defined time period, and the loan is secured by the real estate.
Although the specific loan terms you receive will greatly depend on the lender, property type, debt service coverage ratio (DSCR, more on that later), credit score, and occupancy type, here are some general parameters:
Loan amount: In the world of commercial mortgages, loan amounts fall into two main categories: small balance ($200,000 to $5M) and higher balance ($5M to $50M).
Loan-to-value ratio (LTV): Typical LTVs for commercial real estate can range up to 75% or 80% depending on the situation.
Term: Short-term bridge loans generally range from 6 to 24 months. Longer-term permanent loans are available at 5, 7, or 10 years, and even terms as long as 30 years. Amortization periods vary from 15, 25, to 30 years.
Interest rate: The interest rate is typically fixed for the life of the loan, but annual rate mortgages (ARMs) are available as well. Loan rates are ever-changing, so the exact rate will depend on your exact situation.
Prepayment penalty: Commercial lenders typically charge a prepayment penalty if you pay off the loan early within a certain number of years. However, it is possible to have no prepayment penalty with a short-term hard money loan.
Commercial mortgage requirements vary by lender and by type of loan. For instance, compared to small-balance commercial loans, hard money loans come with quite different requirements and commercial property loan terms. Therefore, when it comes to commercial real estate finance basics, each case is unique.
But in general, when considering a commercial mortgage loan application, nearly every lender will consider some combination of factors that fall into 2 main categories – property-related factors and borrower-related factors.
At the top of the list is the commercial property itself. The lender will scrutinize the property to make sure it checks all the boxes:
Appraisal: The lender will require a complete appraisal to assess not only the value of the property but also market conditions. If you default, is the value of the underlying commercial property sufficient for the lender to recover the loan amount through foreclosure?
Cash flow: Will the property generate sufficient cash flow to support your ability to repay the loan? In other words, is the debt service coverage ratio (DSCR) and/or net operating income (NOI) high enough?
Property type: Is the property type (e.g., office space, multi-family) a good match for the lender? Commercial real estate lenders frequently specialize in specific property types, while others shy away from certain property types.
Occupancy type: Depending on the property type, lenders may require that it be an owner-occupied property versus an investment property. The underwriting analysis is very different between the two occupancy types.
Ability to show income: How do you plan on showing your personal income? While hard money lenders may skip this requirement, other lenders will require you to show your income through tax returns or alternative documentation such as bank statements or profit-and-loss statements.
Credit: Does your company have a solid credit history? Do you and your partners have a good credit score? Lenders not only look at your company’s business credit score, but also the personal credit scores of you and any co-owners as guarantors of the loan.
Skin in the game: How much “skin in the game” are you putting in? The lower the LTV, the more comfortable the lender will be in lending on the property. They know that when you have enough equity of your own in the property, you will prioritize repayment and work very hard to avoid defaulting on the loan.
Those are the basic commercial property loan requirements. Let’s now discuss the actual steps of the commercial loan application process.
Curious to see if you qualify for a commercial mortgage loan?
To have the best chance of getting your commercial mortgage loan application approved, you should master the basics of the commercial real estate loan process.
Here are the 6 steps of how to get a commercial property loan:
Find the best lender with the best loan program that matches your situation.
Prepare and submit your loan application package to the lender.
Obtain a letter of intent from the lender and sign it if the terms are agreeable.
Prepare and submit all necessary items to satisfy the lender’s conditions.
Wait for the underwriter to review everything and issue final approval.
Attend the closing to get your loan funded.
This first step is the most crucial one. You may end up wasting valuable time applying to lenders that simply do not have the risk appetite for your particular scenario. Commercial real estate financing is complex and requires knowing from the get-go the weaknesses of your particular scenario.
For example, you may want to refinance your multi-family property, but the property’s DSCR isn’t that good. You’ll therefore want to find a lender whose DSCR requirements aren’t so stringent.
Unfortunately, many borrowers who apply to lenders on their own do not realize they’ve applied to the wrong lender until it’s too late.
Therefore, whether you’re a first-timer or an experienced borrower, it can be worthwhile to find a knowledgeable mortgage broker that can help match you with the best possible lender from the very beginning and get you the best loan terms possible for your situation.
Once you’ve identified a lender, the next step is to put together your initial loan application package, which may consist of some or all of the following items:
A loan application form
Authorization to pull your credit (note: some lenders may be willing to go based on an estimated credit score at this point instead of pulling your credit)
Documents regarding the property (e.g., operating statement, rent roll, leases, any recent appraisal you may have obtained to see if the lender will accept it)
Documents regarding the borrowing entity (e.g., articles of incorporation, operating agreement or bylaws identifying the business owners, business tax returns)
Documents regarding each guarantor (e.g., personal financial statement, bank statements, government-issued photo identification)
Any other items you may have on hand (e.g., fully executed purchase agreement with the purchase price if this is a purchase request, or most recent mortgage statement if this is a refinance request).
The exact submission requirements vary by lender, but the goal of this step is the same no matter who the lender is: you need to show the lender enough information to allow the lender to decide whether it feels comfortable proceeding with your request and under what terms and conditions.
Download our commercial loan application package. We’ll show you how to get a commercial real estate loan.
After the lender has reviewed your initial loan application package, they will decide if they want to proceed. If not, you will have to start over at Step 1. If yes, the lender will issue you a Letter of Intent (LOI).
The LOI is a non-binding document that outlines the proposed terms, including:
Subject property address
Loan amount and LTV
Interest rate (and whether it is a fixed rate or an ARM)
Loan term
Amortization
Any prepayment penalties
Confirmation that this is a purchase or refinancing transaction, as applicable
Confirmation that this is an owner-occupied or investment property, as applicable
A preliminary estimate of your closing costs, origination fees, and monthly payments
The LOI is non-binding because the proposed terms are based on just a preliminary assessment of your request. Your file will have to go through the lender’s formal underwriting process to fully determine your eligibility.
If the proposed terms are agreeable to you, be sure to sign the LOI before its expiration date and return it to the lender.
After you sign the LOI, the lender will officially open your file and assign a loan number. The lender will also provide you with a list of documents and information that must be provided to clear out the lender’s conditions.
At the same time, the lender will order third-party reports:
Appraisal
Title
Background check
Environmental report
Credit report
During the time the underwriter reviews your file, there are usually at least a couple of rounds of back-and-forth where the underwriter may require follow-up documentation or new items depending on the review so far.
Once all the conditions are cleared and everything comes back to the lender’s satisfaction (e.g., the appraisal, title work, etc.), the lender will issue their final approval letter.
Unlike the LOI, the final approval letter is binding, since you’ve successfully cleared all the hurdles in the underwriting process.
Once you receive your final approval, your loan is clear to close, and the lender and the title company will schedule the closing date.
At the closing, you sign all the loan documents. Once the lender reviews and approves the signed loan documents, your loan is funded.
Funds are typically disbursed within 24 hours of the closing. As a tip, try to schedule your closing for as early in the morning as possible, to increase your chances of being funded the same day.
We’ll navigate you through the entire process of getting your commercial loan.
Getting a loan for commercial real estate shouldn’t be intimidating. Here are tips and tricks on how to get approved for a commercial mortgage loan with ease.
Because you won’t get a second chance to make a first impression, you’ll want to make sure you get your financial affairs in order before approaching a prospective lender:
Build a strong financial profile. Lenders will evaluate your financial profile to determine your creditworthiness. Build a strong credit history, pay off existing debt, and have a solid financial plan in place.
Prepare a detailed business plan. Your business plan should clearly outline your goals, how you plan to generate income, and how you intend to repay the mortgage. The more detailed and comprehensive your plan is, the better.
Have solid cash flow. Your ability to generate sufficient cash flow is critical to obtaining a commercial real estate mortgage. Be sure to have a realistic estimate of your cash flow, and be ready to provide supporting documents such as tax returns, financial statements, and cash flow projections.
This tip bears repeating: make sure you research several different lenders and choose to apply to the lender with which you will have the greatest chance of getting approved and closing your loan.
The main types of commercial real estate lenders include:
Traditional banks and credit unions
Non-bank lenders
Private hard money lenders
As you move down that list, the level of required documentation decreases.
Traditional banks require nearly all the required documentation listed above in Step 2, in particular tax returns.
Non-bank lenders, compared to traditional banks, allow you to provide alternative documentation such as bank statements instead of tax returns.
Private hard money lenders may simply require the subject property address and an appraisal. In exchange, be prepared to pay higher interest rates.
Choose the lender type that best fits your scenario and offers you the highest chance of qualifying with the documentation you have on hand.
Upon receiving the LOI, if the terms aren’t what you expected, you can try to negotiate the terms, such as a lower interest rate, longer loan term, or other concessions that better fit your business needs. Be willing to walk away if the terms are not favorable, but be realistic as well, as the terms offered may be what the current market bears.
Obtaining a commercial real estate mortgage can be a lengthy process, but you can greatly streamline the process by providing all the requested documentation as quickly as possible.
Be patient and persistent, and be prepared to provide additional documentation or answer questions as needed.
If the lender ends up denying your loan, it is not a dead end. Having a business loan denied is a common scenario and is entirely surmountable.
By following these tips and tricks, you can increase your chances of obtaining a commercial real estate mortgage that meets your needs and helps you achieve your business goals.
Commercial real estate lenders will look for the following red flags when considering your application in getting a loan for commercial real estate:
Inexperienced borrower. If you lack experience in managing commercial real estate, the lender might think you could struggle to maintain the property and generate sufficient cash flow. If you’re inexperienced, you can boost your chances of approval by bringing in a more experienced partner with a strong track record.
Properties condemned or deemed uninhabitable. You can still get a mortgage if you show the lender that you have a clear plan and the capital needed to make the property habitable again. Bank lenders are reluctant to take on these types of loans, but many non-bank lenders will consider them.
Weak cash flow. Your ability to generate sufficient cash flow to repay the mortgage is critical. If your business is not generating enough revenue, you may struggle to make mortgage payments. If you suffer from weak cash flow, a hard money lender might be the best financing option for you.
Unstable or declining market. A market that is experiencing significant instability or decline could negatively impact the value of the property, making it more difficult to secure financing. You’ll need to find a lender that has the risk appetite for these substandard markets.
Working with an experienced mortgage broker can help you complete each step of the 6-step process:
Find the best lender with the best loan program that matches your situation: This is exactly what a mortgage broker is designed to do. A mortgage broker has relationships with dozens of lenders, many of which specialize in tricky scenarios. Working with a mortgage broker will help you save time and quickly narrow down which lender to apply to.
Prepare and submit your loan application package to the lender: This can be a tedious process, but working with a mortgage broker will help streamline this step. Specifically, the mortgage broker will vet your documentation and tell you what revisions, if any, are necessary.
Obtain a letter of intent from the lender and sign it if the terms are agreeable: During this step, a mortgage broker can negotiate the terms, including the repayment terms, on your behalf.
Prepare and submit all necessary items to satisfy the lender’s conditions: Again, this can be a tedious step, but the mortgage broker will help you compile everything and stay on track to clear out the conditions.
Wait for the underwriter to review everything and issue final approval: The mortgage broker will have close communication with the underwriter to make sure everything is needed to issue the final approval.
Attend the closing to get your loan funded: At this stage, communication is vital to make sure your closing is coordinated as smoothly as possible; your mortgage broker will take care of this step for you.
In short, it is vital to have a mortgage broker on your team. DAK Mortgage has the expertise to get your commercial real estate loan. In particular, our president, David A. Krebs, was a commercial underwriter for more than a decade, so having been on the other side of the curtain, we know what it takes to get your commercial loan approved and closed.
Here are some final points on how to get a loan for a commercial property:
Prepare a solid and detailed business plan for the commercial property.
Use an independent mortgage broker to help match you with the best possible lender, especially for tricky situations.
Pay attention to loan terms, such as down payment requirements, amortization, balloon payments, and pre-payment penalties.
Commercial property loan terms are highly customizable. In particular, non-bank lenders offer programs that don’t require tax returns and have a good deal of flexibility in coming up with loan terms that fit the particular situation.
Have your documentation ready at every step of the process. Be prepared to submit additional information and documentation to the underwriter.
Let’s find the best commercial loan program for your situation.
Yes, nearly everyone can get a commercial mortgage. There are many types of commercial mortgage lenders that offer different ways to qualify, so it’s possible to find a lender with the risk appetite for your situation. From traditional banks to hard money lenders, there’s a commercial loan program for everyone.
It depends on the situation, but the most common scenario is to purchase or refinance an existing commercial property. There are also less common mortgages for trickier situations, including new construction and renovation loans, bank statement loans, DSCR loans, foreign national loans, and loans for special-purpose properties.
No. Residential mortgage loans are only for residential properties (single-family residences, townhomes, condominiums, 2-4 units). To purchase or refinance a commercial property, you will need a commercial mortgage loan. The major types of commercial real estate (CRE) include multi-family, office buildings, mixed-use, retail, industrial, and special-purpose.
