Getting your loan application approved by commercial real estate lenders requires more information and effort than most first time buyers expect. But the key to understanding this request and the amount of information which is requested comes from taking a look at the loan from a lenders perspective. Commercial real estate loans are often quite large and hold some inherent risk. The lender is simply trying to eliminate as much risk as possible by being restrictive and stringent about their lending policy. This allows them to make their money and well qualified businesses to make their real estate purchases. They use a system which is sometimes called the three C’s to evaluate loan applications.
Collateral is a big factor in commercial lending. All loans are secured by a lien on the commercial property being purchased. This allows the lender the right to take the property and sell it to pay off a loan in the event that the borrowers default on the loan. If you are requesting a loan which exceeds 80% of the value of the property being purchased, the lender might also request that you offer other property or items as additional collateral for the loan. In most cases the lender would like the loan to only be 80% or less of the property value but in some cases they will accept cross-collateralization.
Cash flow is also an important factor to commercial real estate lenders. They need to see that either the property itself generates enough income to cover the cost of the loan payments or they need to see that the business purchasing the property has sufficient cash flow to pay the loan. In addition, commercial real estate lenders like to know that there are cash reserves or other assets which can be easily liquidated should the economy change and cause a decrease in the cash flow needed to make the loan payments.
There are some occasions when the business does not have enough credit to merit a commercial loan or it has questionable credit. In this case, a commercial real estate lender will require the borrower to personally guarantee the loan. To qualify for this you must have a 660 personal credit score or better, no bankruptcy in the last 7 years, no foreclosures or short sales in the past 3 year and no open tax liens or judgements. If you meet these criteria then your credit history and creditworthiness will be considered during the loan application.
Commercial lenders are looking for a business which is in stable financial condition and has been for at least three years. The lender is also looking for the ability to repay the loan and to have a cash reserve in place if needed. Before you begin a loan application, you should carefully consider how well your business will fare when they are judged on the three C system.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.