The Necessary Steps for Qualifying for a Commercial Real Estate Loan

The Necessary Steps for Qualifying for a Commercial Real Estate Loan

A commercial real estate (CRE/) loan is much like a residential loan; the purpose of course though is to use the money toward the purchase of a business-related property. The mortgage will generally be secured through a lien on whatever property you intend to buy with the CRE loan.

When looking through commercial listings, you may notice that prices definitely tend to be higher than those associated with the residential market. This is why commercial real estate loans are so important to some companies. Not to mention, the resulting purchase could very well give you passive income in a number of different forms to include: rent, tax benefits, various fees such as parking, as well as the depreciation factor.

Depending on what lender you work with, you can find CRE loans that are offered at affordable rates and terms that work with your plans. If you are a business owner, looking into real estate financing may be one of the smartest moves you can make for your company.

Keep in mind, there are a number of different CRE products. Here we offer a brief overview of some of them along with the requirements for applying.

The Different Commercial Real Estate Loans Available

Regardless of your industry or business area, when it comes to a CRE loan, there are five primary types that you will want to concern yourself with. These are:

  • SBA 7(a/) Loan
  • CDC/SBA 504 Loan
  • Hard Money Loan
  • Bridge Loan
  • Traditional Mortgage

While certainly if you have the cash available, you can purchase a property outright, most business owners simply don't have the resources to do this and thus will need to rely on one of these five types of loan products.

SBA Loans

Backed by the small business administration, both SBA 7(a/) loans and CDC/SBA 504 loans, are both standard go-to's for many business owners considering real estate purchases.

With an SBA 7 loan, you can actually use the funds for any type of business expense—not solely real estate, while the 504 loans can only be utilized for real estate or potentially renovations. These carry longer terms (anywhere from 20-25 years/) and the interest rates can range from 5-8%.

Traditional Mortgage

These are issued by the banks and not, consequently, backed by the SBA. Because of this fact they are a bit more difficult to get approved for, not to mention, the criteria are on the more stringent side. Especially if you are a newer business owner or a small business owner, this is probably not going to be your number one choice.

Bridge and Hard Money Loans

These are both short term options that, depending on your current financial position, could be a good choice for you. Bridge loans generally mature quickly, at which point you need to pay it off in its entirety; whereas hard money loans have higher rates but are sometimes the only option for companies just starting out.

A General CRE Loan Overview

Remember that most commercial real estate loans can only be used in relation to new/existing properties. Again, depending on the product, they might also be utilized for renovations or for developing the property. CRE loans are exclusive to companies, meaning a single individual will probably not qualify. And also, more specifically, you are probably going to need to be incorporated as well.

The good thing about these types of loans is that the property itself can usually serve as the collateral. In essence, there will be a lien on the property until the loan is paid off. So, in the event that there is an issue with your repayment status, the lender can take control of the property.

Also, given that dollar amounts are quite high with CRE products, the risk, in turn, is fairly high on the lender's end. Therefore, they do often require a more sizeable amount down—anywhere from 25-30% in some cases.

Qualifying: What You Need to Know

There is prep work you can do to help put you in the best possible position for qualifying for a CRE Loan. Below is a breakdown of some of the more critical steps involved with your application process

Understanding Your Score

As when you applying for pretty much any loan product, the lender is going to want to check your business credit score. The big three agencies are of course Equifax, Transunion, and Experian. This score simply lets the lender know a little something about how trustworthy you are, how prompt when it comes to repayment and what type of debt you currently carry.
Credit scores can range quite a bit—from 300 to 850. With something like a CRE loan, a lender will generally want to see a credit score in the higher end of this range. Especially if you want the most favorable terms possible, you definitely need to be at least above 700.

Other Factors Considered

There are of course a number of other elements that go into determining whether or not you will qualify for a real estate loan, these might include: time in business, annual revenue, debt to income ratio and the total value of assets.

Know where each of these things stands—the more you know, the more prepared you are, the easier the process will be. Plus, you may be able to work on fixing certain aspects of your application if you're aware that there may be an issue. Ideally, you will want to have been in business at least two years before applying for a CRE loan.

Look Beyond the Banks

Maybe you're worried that your application isn't as strong as it could be. Maybe you don't meet certain bank criteria—there are other avenues to explore. There are credit unions and also online alternative lenders that may make the process somewhat easier and far faster. Particularly if yours is a fairly young company, an alternative lender could very well be a great option to explore.

Just keep the terms in mind. The last thing you want is to get stuck with a long term loan that locks you into a higher rate than you're comfortable with. You want to make sure that you go into this purchase with the odds stacked in your favor. At First Union, we offer a commercial real estate loan. Call today!

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