Importance of Credit Score in Commercial Real Estate Loan

David Cohn
Oct 30, 2020
Credit Score

Are you thinking of applying for a small business loan? Yes—your credit score will matter. Different lenders use different sets of criteria to assess applicants.

Most of them (even hard money lenders) will look at your credit score to get a sense of your overall fiscal responsibility.

Also, certain types of commercial real estate loans require higher credit scores than others.

Will Your Credit Score Affect Your Commercial Real Estate Loan Options?

Yes. Borrowers with higher personal credit scores generally benefit from more favorable financing terms.

But this doesn’t mean that you’re doomed if your credit is less than stellar. Some lenders focus on providing commercial property loans for those with low credit scores.

It means having to make do with shorter terms and paying more in interest, but there are options for you.

You may be able to qualify for short-term commercial real estate loans such as hard money, bridge loans, and stated income loans even if your credit score is on the low end, such as anywhere from 540 to 560.

In contrast, long-term and lower-interest loans from traditional banks and lenders and the Small Business Administration (SBA) require a minimum score of 620 to 650.

Capital Investors Direct can help you find alternative funding solutions if you have a lower credit score than ideal. Talk to us today to explore your options.

How is a Credit Score Determined?

Credit scores are a function of several factors, enumerated below from the most important to the least impactful:

  • Payment history – Your credit history is the single most significant determinant of your score. Bankruptcies, statutory and judgment liens, late payments, and debt charge-offs can drive it down.
  • Outstanding debt – Do you always reach and even exceed your credit limit? Are you carrying too much debt for your income? These factors affect your credit score, also.
  • Length of credit history – Lenders generally prefer borrowers who have been actively borrowing money and paying it back for years. The key is to prove over time that you are creditworthy. Banks and other traditional lenders look for patterns showing that you are a responsible borrower.
  • New credit inquiries – Do you always apply for new loans? This may have negative repercussions on your credit score.
  • Types of credit – Demonstrating responsible behavior with various credit types can have positively impacted your score.

Most lenders look at a borrower’s FICO score (provided by Fair Isaac Corporation). FICO scores range from 300 to 850.

A 2019 report from Experian (a consumer credit reporting agency) reveals that 703 is the US's average FICO credit score.

Aside from your credit score, lenders also assess your ability to repay the loan you’re applying for by looking at your assets, your annual revenue, and how long you’ve been in business, among others. Minimum credit score requirements vary depending on the lender.

Commercial real estate loans from banks and SBA-backed loans usually require the highest scores.

Alternative funding solutions and short-term loans are available for borrowers with lower scores. Let’s have a closer look at each option:

CRE loans from Traditional Banks

Ideal credit score: 700+

Because they can offer longer terms and lower interest rates than other lenders, traditional banks also tend to have higher credit score requirements and lengthier application processes.

Both federal and state regulators monitor these lenders, so they have to adhere to strict underwriting standards.

The extended repayment periods and high loan amounts offered by banks - make their loans inherently risky, so they offset these risks with more stringent qualification requirements.

This is why most banks prefer to lend money to people with scores of at least 700, but they also consider borrowers with lower scores in the 620 and 640 range in some cases.

SBA-guaranteed CRE loans

Ideal credit score: 620+

You will likely need at least a 620 credit score for SBA loans, depending on the specific loan type and lender.

Note that the SBA doesn’t directly lend money; instead, it does offer lenders (like banks) a guarantee to back the applications of qualified small business owners.

For example, if you default on an SBA-backed loan, the SBA will pay your lender up to 85% of the total loan amount.

This reduces the lender's risk, as they know that they can recoup most of their losses from the government.

This is why banks are more comfortable lending money to SBA-backed small business owners.

Short-term CRE loans

Ideal credit score: 540+

Is your credit score on the low side? Consider a short-term loan such as hard money, bridge, or stated income commercial real estate loans.

The credit score requirement for these funding solutions is lower, and the application process is more straightforward.

You can typically get the financing you need within a week (versus 45 days from banks).

Of course, short-term lenders counteract their relatively lax qualification requirements with strict repayment terms.

You need a solid business plan to ensure that you don’t end up with the short end of the stick.

This is why it’s best to consult with a commercial real estate financing expert like Capital Investors Direct if you want to apply for a short-term loan.

We can look closely at your situation, goals, and requirements and package a custom solution for your financing needs.

It’s also important to remember that whichever loan you choose, you have to take into consideration other costs involved, including the following:

  • Origination fees
  • Interest or factor rate
  • Closing costs
  • Underwriting fees
  • Late fees
  • Prepayment fees

How do you improve your credit score before applying for a commercial real estate loan?

There are several ways to boost your credit score if you intend to borrow money to buy a commercial real estate property in the next year or so. Here are some strategies to try:

  • Check your credit report to know where you stand. Try to see if there are any mistakes, and report the same to the agency. You can request erroneous entries to be deleted from the report.
  • Try to drive your debt-to-credit ratio lower than 30%. Even better if you can keep the mortgage rate under 10%. A good way to do this is to request a credit line increase on some of your credit cards. This can help you lower your debt-to-credit ratio. It’s worth doing because about 30% of your credit score is based on how much outstanding debt you carry relative to your credit line. That said, never open a new credit line right before applying for a loan, as this can potentially knock down your score by as much as 10%.
  • Make it a habit to pay your credit card bills diligently and on time every month. It doesn’t matter if you’re using a business or a personal credit card—you have to keep track of due dates and pay ahead of schedule, if possible.
  • If your credit is poor, you might benefit from opening a secured personal credit card backed by a security deposit (which serves as your collateral). The spending limit on this card is equal to the amount you put down. Show responsible paying behavior month after month to boost your credit score.

Do lenders consider other factors aside from the credit score?

Yes. Commercial real estate loan lenders will also look at your business's viability and track record when evaluating applications. They may look at your:

  • Business plan – Be clear about your purpose, goals, and financials. Show your step-by-step strategy for meeting your goals for the commercial property you want to finance. Lenders want to see where you are and where you’re going.
  • Length of time in business – How long have you been operating? If you’re a CRE investor, how many deals have you done in the past? The minimum length of time required by lenders vary from 6 months to 2 years.
  • Revenues and cash flow history – Prepare documents that show how much you/your business makes. Demonstrate your cash flow in the last year or two.

Finally, if you’re finding it difficult to get the commercial property loan you need, consider using the help of a CRE funding specialist.

We are here to help. Contact Capital Investors Direct today.