A commercial mortgage is a type of mortgage loan secured by commercial property. The proceeds of this type of loan are typically used to purchase, refinance, or redevelop commercial property. There are several different types of commercial mortgages. Read on to find out which type is best for your particular needs. Here are some common uses for this type of loan:
Due diligence: A commercial mortgage entails rigorous due diligence on the part of the lender. They may request a site tour, analyze financial statements, or look at the borrower’s business history. They may even order third-party reports on the property. Lenders typically favor people who have experience owning or operating businesses that are active in the commercial property sector, such as a buy-to-let operation. These lenders typically perform a thorough underwriting process to ensure the borrower’s ability to pay back the loan.
When choosing a commercial mortgage lender, make sure you check the loan term and the debt-to-income ratio. Commercial mortgages are typically for five to 40 years, which means that you will be making a substantial financial commitment. Because commercial mortgage lending is considered a higher risk, rates and terms are generally higher than for residential mortgages. Also, you’ll most likely be required to put down a larger deposit than if you were applying for a residential mortgage. This translates into a lower loan to value (LTV) rate and greater equity in the property.
Commercial mortgages can also be a good option for business owners, since they differ in terms of repayment. Refinancing your mortgage will allow you to secure better rates, which will allow you to free up cash for your business. And while you might not want to do this every time you need money, if you can get your existing mortgage rate reduced, refinancing might be the way to go. You should take note that commercial mortgages have different interest rates than residential mortgages, so it pays to shop around before choosing a lender.
Bridge loans are often used to bridge the gap between short-term and long-term financing. A business owner might use a bridge loan to compete with all-cash bidders, but later on may choose to refinance for a longer-term mortgage after the sale of the property is completed. However, you should keep in mind that bridge loans typically have a short-term term, and they must be paid off when they mature. Bridge loans often carry higher interest rates than a traditional commercial mortgage.
Lenders calculate debt service coverage ratios (DSCRs) when underwriting a commercial mortgage. This ratio is calculated by dividing net operating income by the amount of money used for debt service. If the DSCR is higher than this, your loan will be rejected. If you have good credit, this ratio is a good indicator of a business’s financial health. Ultimately, the DSCR can make or break your commercial mortgage application.