Commercial Mortgage is a whole lot different from home Mortgages. The process is different, the terms and requirements are different as well. Commercial loans are not backed by governmental entities like Fannie Mae. This makes the Commercial Mortgage lenders are at a high risk which is why the lenders charge interests than Home Mortgages.
There are a lot of things that a person should consider before applying for a commercial loan.
Meeting the repayment terms for the Commercial Mortgage:
Banks, unlike Home Mortgage, require Commercial Mortgage to pay the loan before its due date. It does so by making the business owner pay the amount in a balloon system. For example: If you apply for a Commercial Mortgage and the repayment terms are for a period of 25 years, the bank will make you pay the interests for 5-10 years and the later will make you pay the rest of the money.
Most of the time borrowers are not able to get a huge amount of money in a short amount of time which is why they have to reapply for another loan or requalify for the same one.
One needs to consider these things before deciding whether a commercial loan is for you or not.
What amount should you borrow?
Banks require you to make a down payment of at least 20-25% of the loan amount. Say you are borrowing $600,000 you need to have $120,000- $150,000 as a down payment. Before lending the banks look into two main things, what amount of money is the lender going to actually require and analyze their ability to repay the loan in its decided structure?
If the down payment is an issue, non-traditional loan options are also available. Here the borrower gives less downpayment maximizing loan to value (LTV), 85-90%. These loans are not available at banks and the rate of interest is higher than that of regular Commercial Mortgage bank loans.
How long does it take to apply for a loan?
The process for applying loan takes very long as the loan is reviewed from various angles and check all your previous records, statements of cash flow, they also receive 5 years of tax records of the applicant and the loan people who guarantee the loan. It usually takes weeks before the borrower gets a verbal or written approval or a commitment letter from the bank.
Covenants and Conditions required?
Loans ask you to provide quarterly or annual income statements, balance sheets, and tax returns. If your application falls short of terms then your application might go to default and a lot of penalties are applied to a default application.
Lenders require 3-5 years of financial statements, income tax returns, and other documentation like leases, asset statements, original corporate documents, personal financial records of the business owners. If you are a small business you might not have the right documents for the loan application. If you go ahead if time and enquire you can get to the application process and collect the necessary documents.