A commercial real estate transaction will not be closed unless the loan has already earned approval. Basically, you may improve your cash flow once the interest rate on your loan is low. This only implies that when you are more knowledgeable about commercial loans, the more you are capable of coming up with a better decision for your investment. This is how it usually works.
The Qualification of the Loan
Anyone who has applied for residential loans is surely aware of the process for this commercial real estate loan. You will be in-charged in providing lenders the following:
- Tax returns so that income may be verified.
- Brokerage or bank statements so that down payment and liquid assets may be checked.
Generally speaking, when you are capable of obtaining more personal income, you are most likely to qualify for a higher amount of loan. This is the simple premise here. There are even times when you might be eligible to borrow almost 95% of the purchase price for the 1-unit principal resident. This may transpire for those who are with sufficient income. It really depends on your condition.
As far as the commercial loan is concerned, the amount which a lender approves is calculated from the net operating income or NOI of the property. This is not intended for the personal income. This is considered to be the fundamental difference between a commercial loan and residential qualification. Thus, once you purchase a vacant commercial building, you might have a hard time seeking a loan approval because the property does not incur any rental income. However, there are exemptions to this. These are the following:
- Occupy almost 51% of the space for the business. This is a chance to apply for the SBA loan.
- Earn a sufficient income which may be obtained from a different commercial property. This may be utilized as a collateral. There are just lenders out there who might take interest in your business. This may occur as well.
It is known for most commercial lenders to be way conservative when it comes to loan to value or LTV. This means that lenders will only loan the amount including NOI to the mortgage payment for the loan. Such is sometimes referred to as the Debt Coverage Ratio or DCR. Or there are instances when it is referred to as the Debt Service Ratio or DSR. This can be 1.25 or even way higher. This requires for the NOI to be 25% more than that of the mortgage payment.
The aforementioned implies that the desired loan amount may be obtained provided that you have a positive cash flow of at least 25%. This should be directed towards the mortgage payment. This means that when you buy a property that goes with a low cap rate, you will be asked to own a higher down payment so that you can meet the DCR of the lender. This usually transpires as well. Do not forget to consider.