Are you thinking of applying for a commercial real estate loan and are wondering if your credit score is good enough?
Here’s the short answer: Lenders typically require a minimum credit score of 660 for commercial real estate loans. Some lenders require a 680 minimum.
In this blog, we go beyond the credit score to explore commercial real estate mortgages’ basics. We also talk about the other factors a lender will probably look at when assessing your eligibility.
What can you use a commercial real estate loan for?
You can use a commercial real estate loan to buy or improve a property for business purposes. To qualify for a commercial property loan, you need to use at least 51% of the land or building for your own operations. You are allowed to lease the rest of the property for as long as you use the majority of it for your own business purposes.
Here are examples of instances where a commercial real estate loan may be suitable:
- Purchasing a warehouse for your inventory
- Buying a retail space for your shop
- Buying an office building for your company
- The building, renovating or buying a hotel property that you will operate yourself
You’ll need to have solid credit to get a commercial real estate loan. You need to be ready to make a sizable down payment of at least 25% on top of this.
That said, certain loan types such as SBA loans make it possible to have a lower down-payment—just 10% in some cases. You can also use mezzanine financing on top of your property loan to lower your down payment requirement to about 15%.
Why are commercial mortgage requirements so strict?
Commercial real estate loans are riskier and far more complex compared to conventional home loans. This is why lenders have stringent requirements for underwriting and collateralization.
There are far fewer lenders dealing in this area compared to personal mortgages. This means that commercial mortgage lenders often have to hold these loans after issuance instead of selling them to investors willing to assume losses when borrowers don’t repay.
As a result, commercial mortgage lenders tend to be risk-averse, requiring higher credit scores and down payments. And because mortgage insurance does not apply to commercial loans, interest rates, and income requirements are also higher.
Commercial property loan terms, rates, and fees at a glance
Different types of commercial property loans
Borrowers can choose from several types of loans to finance commercial real estate, each with its own eligibility requirements, terms, rates, and application process. Here’s a summary of the most common types to help you decide which one is right for your case:
*Note that portfolio loans are often used by commercial real estate investors who act as landlords, with several properties in their name that they lease out to tenants. Lenders see this activity as speculative to impose stricter eligibility criteria, terms, and rates. If you want to use a portfolio loan to buy multiple facilities that you intend to use for your own business purposes, be sure to make this clear to the lender.
Choosing the right lender
It’s important to work with a lender that can offer the type of commercial property loan you need at rates you can afford. You also have to make sure that you can meet their qualification requirements. Here are some factors to think about when selecting a lender:
- Origination fees
- Available loan options
- Starting interest rates
- Time-in-business requirements
- Documentation requirements
- Personal guarantee requirements
- Prepayment penalties
- BBB ratings
- Bad-credit and/or fast-funding options (if you require them)
Requirements for Commercial Property Loans
Getting approved for a commercial real estate loan is not the same as qualifying for a home loan. The lender knows that you will use the property to conduct business and pay back the loan using your business revenue, so they want to ensure that your company makes enough to cover the payments.
Income Requirements –
You have to demonstrate to the lender that your business makes plenty of income relative to its expenses. They want to be sure that you can afford the monthly loan payments. Most lenders require a debt-service coverage ratio of at least 1.25. They will also ask you to provide your business tax returns for the last two years. Some lenders will ask for your personal tax returns because even though you are borrowing for business purposes, you still have to sign it personal guarantee.
Be prepared to show your company’s operating agreement and organization documents. You will also be asked to provide a copy of your passport, birth certificate, and other personal documentation.
Security Requirements –
Commercial property lenders want to be sure that the loan can be properly secured by the land or building you want to borrow against. This is why they usually ask for a down payment of at least 25%. Lenders will also ask for property insurance that adequately protects against any damage to the collateral. They will thoroughly check the title and other documentation related to the property to ensure no liens or claims are against it.
Credit Requirements –
The lender will likely check both your business and personal credit score. The minimum varies but typically ranges between 660 and 680.
To assess your credit risk, lenders will also check how long you’ve been in business. Two years is the usual minimum, although some lenders are willing to work with companies operating for one year. The key is to show your company’s viability and steady revenue. You have to demonstrate that you have a stable source of funds to repay the loan and won’t go out of business anytime soon.
Commercial property lending is complicated, especially for business owners who have never applied for this type of financing previously.
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Consider working with a commercial property loan broker who can tailor a financing solution that is suitable for your goals and requirements.