Commercial real estate financing is the loan that is used to purchase any property which has the potential to make money for the owner. Understanding the qualifications for these loans will help you to prepare an effective loan application package.

Commercial real estate financing is a sector of the lending industry that represents a greater risk to the lender. This is because the financial health of a business is more directly linked to the overall economy than that of a consumer. A small fluctuation in the economy will rarely impact a person’s ability to pay their mortgage but it can have a great impact on a business’s ability to make payments. In addition, commercial real estate values tend to fluctuate more and more rapidly than residential property values. This means that the collateral on the loans could lose value very quickly. All of these are reasons that the qualification process for commercial real estate financing is longer and more arduous than residential real estate financing.

As with most loans, commercial real estate financing requires a strong credit score to obtain a loan from a conventional lender. A score of over 680 is really a necessity. Another important factor is the market value of the property that you are interested in purchasing. In most cases the property being purchased is going to be the collateral for the loan. For that reason the lender is very concerned that the property value be well in excess of the loan amount. And that the property also have a steady value historically. In addition, the lender is likely to require that the borrower make a down payment of more than 20% of the value of the property. This creates instant equity for the borrower and protects the lenders interests as well. In the event that the borrower defaults, the lender will need to sell the property to cover the balance of the loan. With instant equity that is a much simpler task.

Cash flow is also important. That demonstrates to the lender that the business has sufficient funds to pay the loan each month. In most cases lenders want to see net income of 20% higher than the carried debt at the very least. It is also beneficial to have savings or other assets that could be liquidated if there is a sudden down turn in business.

A Guarantor

In many cases, a business does not have sufficient financial history to qualify for a commercial loan. In this case, the lender will require the owners to sign a personal guarantee for the loan. This means that if the business fails or cannot make the payments for any reason, then the owner is personally responsible for making the loan payments. For this reason, the owner must be able to demonstrate financial stability and the ability to act as the guarantor.

Know Where You Stand

In most cases there are fees involved in applying for a commercial loan. For that reason it only makes sense to be very careful about examining the financial position for your business and also your personal finances prior to applying for a loan. If you are not able to meet the criteria of traditional lenders then you might want to investigate less conventional lenders such as online lenders or hard money loans.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177 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.

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