What Are the Key Requirements for Obtaining a Commercial Real Estate Loan?| Don McClain

In real estate, a commercial real estate loan is like a mortgage that can be used to buy or refinance commercial properties. These properties are used as collateral for the loan. Common types of commercial real estate include apartment buildings, office buildings, shops, mixed-use spaces, factories, and special-use buildings.

Don McClain highlights that a property's classification as commercial determines if a loan is for commercial real estate. If a loan is needed for a home, such as a single-family house, condo, duplex, triplex, or quad, a residential loan is required instead.

What Are the Key Requirements for Obtaining a Commercial Real Estate Loan?| Don McClain

Commercial Real Estate Loan Requirements

When talking about commercial real estate loan requirements, they depend on two things: the lender and the type of loan. For example, hard money loans have different requirements than small-balance commercial loans. Each situation in commercial real estate financing is unique.

When applying for a commercial mortgage loan, lenders usually look at two main categories: property-related and borrower-related factors. These factors help lenders decide whether to approve the loan.

Property Requirements for Loans

Commercial property is the most important factor when looking for a loan. Lenders carefully check the property to ensure it meets all necessary requirements.

Property Appraisal

The lender needs a full appraisal of the property. This helps determine its worth and market conditions. If the loan is not paid back, the lender must know if the property's value is enough to cover the loan amount through foreclosure.

Cash Flow Analysis

In order to help repay the loan, the property needs to generate enough cash flow.

This means checking if the debt service coverage ratio (DSCR) or net operating income (NOI) is enough to support payments.

Property Type

Is the property type, like office space or multi-family units, a good fit for the lender? Many commercial real estate lenders focus on specific types of properties, while others may avoid certain ones. It is important to match the property type with the lender's preferences.

Occupancy Type

Lenders often have different requirements based on the property's occupancy type. Some lenders may want the property owner-occupied, while others may accept it as an investment property. Reviewing the loan is very different for these two types of occupancy.

Requirements for Borrowers:

Showing Income

How will income be shown? Some lenders, like hard money lenders, might not need this, but many will require proof of income. This can be done through tax returns, bank statements, or profit-and-loss statements.

Credit History

Does the company have a good credit history? It's important to check if the company and its owners have strong credit scores. Lenders look at all owners' business and personal credit scores as guarantees for the loan.

Skin in the Game

How much personal investment is being made? The lower the Loan-to-Value (LTV) ratio, the more willing lenders will be to provide the loan. When there is enough personal equity in the property, it shows a commitment to repayment and reduces the risks of defaulting on the loan.

Final words:

After reading this informative guide, you now know all the essential details about commercial real estate loans. Hopefully, the information shared in this post about commercial real estate loans, including tips from Don McClain, will be helpful for your search. Thank you for reaching out!