How Does a Real Estate Commercial Loan Work? 6 Key Points

The real estate commercial loan is an essential tool for many property investors. It’s very possible that you could find yourself needing one at some point in your real estate career. So, you should be ready and informed for when that time comes. Check below for a comprehensive guide on the core aspects of real estate commercial loans.

Main Takeaways

• The real estate commercial loan is used to fund the expenses of for-profit properties, like rentals.
• 4 of the most popular real estate commercial loan types are: investment property loans, construction loans, speculative construction loans, and bridge loans.
• You should carefully iron out your finances, assemble your papers, investigate lenders, and be positive you can repay your loan to prepare for your application process.
• Some common eligible criteria are the soundness of your business plan, credit score, yearly revenue, your collateral and down payment.

Table of Contents

1. What is a Commercial Loan Used For?
2. The Difference Between Commercial Property Loans and Residential Property Loans
3. Eligibility Conditions
4. About the Loan-to-Value Ratio
5. Commercial Property Loan Types
6. 4 Tips for Scoring the Best Deal

What Is a Commercial Loan Used For?

Real estate business loans are more often called commercial property loans or commercial real estate loans. As Baltimore hard money lending professionals, we often see people use commercial property loans for buying, constructing, renovating, or refinancing business-purposed properties. By business properties, we mean properties intended for profit-making, not personal use.

Also, people can use a commercial property loan for general business-related purchases. For instance, they can buy furniture or equipment. Or, they can use the consistent cash flow to fill in gaps during more uncertain times. The funds can finance suppliers, inventory, or payroll. In summary, if you have expenses related to commercial real estate, these loans likely can cover them.

The Difference Between Commercial Property Loans and Residential Property Loans

Real estate commercial loans and residential loans are used on different types of properties. They also have different payoff timeframes and bases for underwriting.

With residential loans, you use them exclusively on your own residence. The underwriting is based on your personal finances. Finally, it takes a longer time to finish the payoff period.

Meanwhile, as we discussed earlier, investors use real estate commercial loans for development and business purposes. In addition, their underwriting is based on factors such as your property and your business’s financial plan and income.

Furthermore, commercial loans have shorter payoff timeframes. If borrowers can’t pay by the end of that term, they can renew the loan again later.

Additionally, commercial loans can have higher fees, down payments, and closing costs than residential loans. After all, residential loans fund smaller-scale projects.

The commercial loan appraisal process involves a review of the property’s potential rental income, comparable sales, and possible replacement expenses.

Eligibility Conditions

In order to qualify for a commercial property loan, you must meet certain criteria. Each lender has various criteria. However, there are a few factors lenders commonly consider:

Credit Score: Many lenders consider your credit score to see how prepared you are for taking on a commercial loan. Luckily, some lenders factor in additional factors when considering you as a borrower. For example, a hard money lender will place significant weight on your property, not just your credit score.

Business Plan: Lenders will take into account your overall business plan to show your strategy for success. They want to see your financial projections, financial projections, and long-term plans. This way, they can examine how profitable your business will be, and by extension, how well you’ll be able to repay the loan.

Yearly Revenue: Lenders can get a feel for your general financial condition by reviewing your yearly revenue. The higher your revenue is, the higher your chances of loan approval and favorable terms.

Collateral and/or Down Payment: Many lenders use down payments or collateral to secure your stake in the commercial loan process. By doing this, the lender can minimize their risk and allow you to qualify for better terms.                                

About the Loan-to-Value Ratio

Crucially, lenders use loan-to-value (LTV) ratios to size up the loan amount in comparison with the asset’s total value. LTV ratios can also reflect your amount of property equity, as well as the money amount they want you to put down.

You can calculate the LTV by dividing your commercial loan amount by your property’s value. For instance, imagine your lender offers you $350,000 to cover a $500,000 property. In this scenario, the lender uses a 70% LTV ratio ($350,000/$500,000 = 0.7, or 70%). Therefore, you get a loan that is 70% of the property value. Then, you would pay the remaining 30% as your down payment (in this specific case –lenders can offer lower or higher down payments).

LTVs can go from 65% to 85%, based on your lender, your property type, and your qualifications. The lower your LTV is, and the higher your initial down payment is, the better interest rates you could pay later.

Commercial Property Loan Types

There are various commercial property loan types available for all kinds of projects. Think about whether the following loans are suitable for you:

Investment Property Loans

The investment property commercial loan is made expressly for for-profit properties. In other words, they’re intended for properties that you and your business will not occupy yourselves. Rather, they are created for properties others will use and pay rent for.

Construction Loans

Investors use commercial construction loans to fund the construction of new properties or renovations to existing ones. Typically, lenders structure them under draw schedules. Here, you receive bursts of money to use at different stages of the project, rather than getting one lump sum at once.

Speculative Construction Loans

Speculative construction loans are similar to regular construction loans, with one big difference. These loans fund new properties you speculate will someday have profit potential but haven’t created a ready audience for quite yet.

These can serve as an ideal investment for people who want to buy land cheaply and sell or rent for high gains.

Bridge Loans

Various lenders offer bridge loans to give you temporary financing until you can find longer-term funding. Needless to say, these loans are usually short-term, sometimes from six months to three years.

4 Tips for Scoring the Best Deal

If you want to get the best commercial loan deal possible, you have to come in prepared. Do your due diligence by researching ways to get tax benefits from your commercial property loan and other factors.

Iron Out Your Finances

When you apply for a real estate commercial loan, most lenders consider numerous factors. For example, they will count your income, debt-to-income ratio, equity, and other financial factors. So, you should strive to improve these elements for the chance to get better loan qualifications.

Furthermore, many real estate commercial loan providers have minimum credit scores. However, some lenders, like hard money lenders, have more wiggle room for credit score imperfections than traditional banks do. Either way, you should maintain a decent credit score of at least 500 to 600.

Assemble Your Papers

By gathering your documents beforehand, you can accelerate the application and underwriting periods. Oftentimes, lenders will request recent income statements, ID information, property information, tax returns, and other forms.

Investigate Lenders

Some lenders can be predatory. So, always make sure that they’re legitimate, respectable lenders before committing to anything. For example, you can check to see if they’re registered in your local government’s business database like ours is (if we may shamelessly self-promote ourselves!)

Then, you can examine the quote, agreement terms, and all subsequent negotiations to make sure your lender is the right fit for you. Afterward, you can get to the next step.

Keep Your End of the Bargain:

After you’ve chosen your lender, you must go through the agreement carefully for full understanding. Last but not least, you need to follow through with repayment.

Make Sure Your Lender is Reputable and Established

If there’s one thing you should take away from this article, it’s that you need to stay savvy and safe throughout the whole real estate commercial loan process. You need to choose a lender capable of meeting you where you’re at now, as well as where you’re headed.

We are confident that we can be what you need. After all, our team has years of experience in the Maryland real estate industry. Many of us understand what it’s like to be on the other side, to be an investor at a crossroads in your real estate endeavors.

That, in turn, is why we take your projects very seriously and strive to provide the customer service only a local business like ours can. Contact us today to connect with the best real estate commercial loan professionals in Maryland.