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Thursday, 22 May 2008 22:25 |
Preparing for a Commercial Loan...
 Quick Tips for Commercial Financing
by Kirk Moormann
Agape Home Mortgage
(503) 504-4493
The following is a thumbnail sketch of what to expect when obtaining financing for your commercial property. You'll learn about: types of lenders, the loan process and standard documents required.
There are basically three types of lenders. Each one varies in their underwriting processes, documentation requirements, terms, fee structures, and properties they will finance. They are:
CONVENTIONAL
RESIDENTIAL-STYLE
PRIVATE MONEY Following are the descriptions of each lender. Use this as a guide to help you decide which financing type may be best for your individual situation.
CONVENTIONAL - usually banks and credit unions
- loan amounts up to $100 million
- heavy documentation requirements
- limited property types financed
- rates usually lower in comparison with other lender types
- more strict of debt service ratios
- 20% minimum down payment in most situations
- up to 6 months processing time depending on complexity
- large lending institutions, often with smaller offshoot companies specializing in certain commercial loan types
- take a more residential approach to commercial lending
- more flexible with debt service ratios and credit scores
- will finance many property types such as: gas stations, strip malls/shopping centers, auto repair shops, doctors offices, etc
- loan amounts up to $5 million
- slightly higher rates than conventional
- usually carries a prepayment penalty, but flexible terms
- as little as 10% down
- 4-6 weeks processing time
- typically privately held companies that have pools of money from partner investors
- loans are more case-by-case scenario
- credit score and income usually not a big issue
- will finance many property types
- not as concerned about debt service ratio as they are the exit strategy for the loan
- short term, high interest rate, high fees, no prepayment penalty
- designed for the investor who needs interim financing
- fast turnaround; funding in as little as 10 days
- down payment 30% minimum; will often cross-collateralize with other properties if insufficient cash for downpayment
THE LOAN PROCESS The loan process will vary from one loan to the next but this is the standard flow: - broker runs scenario by lender for feasibility
- borrower completes application
- broker pulls credit
- broker gathers required documentation from borrower
- submits file to lender
- lender reviews preliminary submission
- issues commitment letter upon preapproval
- non-refundable commitment fee is collected from borrower (to lender); usually $500-$1500
- appraisal ordered by lender; borrower pays for - $1000 to $5000 depending on property type
- upon final lender approval, loan is signed and closed
Things to keep in mind:
>The appraisal usually doesn’t get ordered until the deal is at least prequalified. Even if the loan does not go through, the borrower is responsible for the appraisal.
>Even on a commercial refinance loan, fees for closing costs are not wrapped into the loan amount like a residential loan. All fees must be paid at closing.
>Some lenders will require a separate Broker Fee Agreement to be signed by the borrower
>In most cases, allow a minimum of 2 months for a loan to close from start to finish
STANDARD DOCUMENTATION
Like the loan process itself, documentation requirements will vary from loan to loan. A good rule of thumb is to have the following documents ready:
- last 2 years tax returns (personal and business)
- last 2 years W2 statements
- Year to Date Profit and Loss statement if self employed
- Operating Financials for the business being purchased (rent rolls, etc.) if appl.
- written narrative of the transaction
- most recent statements from any liquid assets
- name and number of insurance agent
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Last Updated ( Wednesday, 02 July 2008 03:45 )
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