Understanding Commercial Mortgage Guidelines
Why would a borrower need to understand commercial mortgage guidelines? Isn’t that what the loan officer is for?
When a borrower becomes well versed in commercial mortgage guidelines then that borrower can easily save themselves time and money. Also, that borrower becomes a savvier real estate investor. The commercial loan officer’s job is to know the guidelines and help inform their clients of options. The loan officer is also there to navigate and process the loan until the loan is closed.
Here are some basics that real estate investors need to know:
1. FICO score and credit history.
This is one of the first questions a lender will ask when discussing your deal.
Past bankruptcies, foreclosures, tax liens, and other issues will make it very difficult to work with a traditional bank. However, an alternative lending option may be able to overlook an event like a bankruptcy, provided it occurred far enough in the past.
Keep in mind that a lender will likely run their own credit report if the one you provided is more than a few months old.
Acceptable credit score ranges vary from lender to lender. As an example, our minimum FICO score is 650.
2. Learn as much as you can about the commercial property you are going to purchase.
It’s in a commercial lender’s best interest to make their list of eligible property types as readily available as possible.
That’s because an ineligible property type is one of the quickest and easiest ways to disqualify a scenario. Generally, ineligible property types are those with DEP/EPA issues, currently in litigation, or have a history of failure. Although with a well-crafted business plan and know how, a previously failed property can be turned into a success story.
If you are doing a refinance, make sure the property has been stabilized. If it has been stabilized for less than 2 years, you may be limited to more non-traditional solutions. A local bank will usually not look at a property that does not have a long history of success. On the other hand, Spartan Commercial Mortgage has solutions to assist borrowers that have owned a property for less than a year.
3. Location, Location, Location!
Almost more important than the commercial property in question is its location.
You can start your analysis by making sure your potential lenders do business in the property’s state. Then check the city and county population – if the property is located in a rural area, there will likely be a smaller number of lenders willing to transact.
As an example, we do business in counties with 200,000+ residents, though exceptions do occur.
Looking to get a better sense of a property’s location? Take advantage of Google Earth. Using this tool, you can get both a street-level look at the building and an aerial view of the surrounding area. With Google Earth’s help, you’ll quickly be able to tell if you’re dealing with a rural, suburban, or urban property.
4. Ownership structure.
Is the borrowing entity an individual or a business such as a Limited Liability Company? Are the guarantors U.S. citizens or foreign nationals?
This is important because lenders have very specific guidelines regarding borrower/guarantor ownership structure and are unlikely to make exceptions in this area. Many times, a borrower will qualify for 80% or more LTV financing if they are doing the loan in a LLC. We often suggest you consult an attorney or your CPA about the best way (for your needs) to transact your closing.
5. What is your loan purpose?
This question is basic enough. Sometimes borrowers are looking to lower their rate. Maybe they are looking to simply acquire the property and need a purchase loan. Perhaps they are looking for a renovation mortgage. Or, they require to do a cash out refinance.
Each one of these loan types have different commercial mortgage guidelines. The borrower is going to need to know if the property debt services. This simply means – do the rents in the property more than cover the expenses. If there are vacant units then this can sometimes be an issue for underwriters.
With cash out refinancing, commercial mortgage guidelines will require to know the purpose of the loan. Underwriters will want to know what the cash is being used for. Are you rehabbing the property? if so, does that mean that the property will be without rental income for a period of time?
The main reason that underwriters want to know what you are doing with the cash out income is to make certain it will not put the property in jeopardy. I know that sounds insane because if you have cash then the mortgage payments will get made. Unfortunately, this is not always the case. Underwriters want to make certain that borrowers have a strong plan of action with the cash they are taking out. That way, the chances of failure or foreclosure decrease greatly.
In Closing
At Spartan Commercial Mortgage we are here to help you every step of the way during the underwriting process. We are here to help make you the best real estate investor you can be. As well, we want to make the process seamless.
Click here to get pre-approved or to set up a time to speak with us about your options. Commercial mortgage guidelines are easily navigated through with Spartan Commercial Mortgage.
Michael Meyer
President Spartan Commercial Mortgage Services
mike@spartancommercialmortgage.com
(860) 876-0572