Tips for Getting the Best Commercial Loan Terms
Whether you are purchasing commercial real estate for your business or as an investor, you know that your loan terms can affect your financial bottom line. However, because they are different from traditional residential mortgages, you have to do a few things differently before you can secure a good commercial mortgage. These are a few tips to help you.
Save for a Large Down Payment
While residential loans typically have a 5-20% down payment requirement, commercial property loans can require a down payment of up to 35% of the property price. Some lenders only require a 20-25% down payment but pay attention to how your down payment affects your other loan terms. In general, the larger the down payment you save, the better your other loan terms, such as your interest rate and the repayment period.
Build Strong Business Credit
It takes time to build personal and business credit. If you want to purchase a building for your company or you have started a property investment company, you need to build your business credit. Some banks will consider your personal credit on your loan application, but most want to see a positive credit history for your business as well.
Prepare for Shorter Loan Terms
While residential mortgages typically have 30-year terms, commercial real estate loans usually have much shorter loan terms. For example, some banks only offer loans that have 5-20-year loan periods. This will affect your payment amount, but shorter terms can be beneficial because you end up paying less interest. Therefore, work out a budget that supports paying off your loan quickly.
Investigate Interest Rates
Commercial property loans typically have higher interest rates than residential loans. In addition, most of these loans have prepayment penalties and other fees if you pay your loan off early. Investigate the interest rates offered by multiple lenders to find your desired fixed- or adjustable-rate mortgage. However, do your homework beforehand to ensure that you can make the payments at the rate you choose, especially if you choose an adjustable-rate loan.
Prepare Your Paperwork Early
Commercial lenders require more paperwork than traditional lenders. Not only do you need to prove your personal income and payment history, but you also need to provide evidence of your business’s financial situation. Include any quotes you received from insurance companies, and don’t forget your taxes from several years. You will also need your company’s financial statements. You should even prepare several financial ratios that the bank can review.
Your commercial real estate investment will give you real assets that accrue value over time.