Commercial vs. Residential Loans
While commercial and residential real estate loans have their similarities, they are actually quite different. Residential loans are typically focused entirely on an individual or family’s financial situation. Debt-to-income ratios, credit scores, and down payment funds help loan originators determine if the individual or family qualifies for a mortgage.
On the other hand, commercial loans focus on a business’s creditworthiness. The lender heavily scrutinizes the company itself, as they are supplying money to purchase property for business purposes.
Commercial lenders must see that an organization’s business plan and finances are strong enough to take on the additional debt. Rather than looking at personal metrics of financial readiness, commercial loans are almost entirely dependent on the business’s history and trajectory.
What You Need to Apply
To apply for a commercial real estate loan, you will need to have the following ready:
- Business Plan: Showing a lender your business’s path forward and how you plan to get there is a crucial aspect of qualifying for a commercial loan, as it shows income projections.
- Income Information: Income documentation is always required, as lenders need to see that your company is earning enough money to pay off potential debt.
- Tax Returns: One of the easiest ways for loan originators to determine income information is to review final tax returns from previous years.
- Expense Details: How much money does your company spend on a regular basis? This is a telltale sign of whether your business is ready to take on an additional mortgage payment.
- Current Debts: Similar to residential real estate loans, the type and amount of current debts a business has will be examined and may hinder their qualification if the debt is deemed excessive.
- Business Bank Statements: Lenders always need to verify bank accounts, cash amounts, and a proper paper trail of where down payments are coming from.
- Appraisal: Since the property is viewed as collateral for the loan, a third-party appraisal is always required to determine the building’s unbiased market value.
Commercial real estate lending comes with many intricacies. If you have questions about where to start, please contact Steve Longenecker and Northern Colorado Commercial Real Estate at WeBrokerCORealEstate or 720-600-9513.
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