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A commercial mortgage involves borrowing money to finance real estate, but this time it’s not intended for residential purposes but rather for commercial purposes like businesses such as companies, corporations, and partnerships.
Usually, a mortgage is taken out against the commercial property, which serves as a collateral or guarantee until the mortgage loan is paid. The loan is paid back through installments with fees and interest over a set timeframe.
It is essential to know and be educated before applying for a commercial mortgage loan since the process and payment plan can be complex, pricy, and risky compared to a home mortgage.
You’ll have to indicate what type of property you want to finance if you apply for this type of loan.
Below are Canada’s most common commercial properties with loan-to-value ratios (LTV).
• Construction project – depending on the property
• Industrial – 75%
• Farmland – 55%
• Commercial Plaza – 75%
• Storefront with residential commercial mixed – 80%
• Multi-family Residential 1-4 units – depending on the property
• Multi-family Residential 5 or more units – 85%
You can finance three types of residential properties with commercial mortgages if you’re a landlord looking to purchase multiple investment properties.
• Pure Residential (1 to 4 units)
• Pure Residential (5 or more units)
• Residential Commercial Mixed
Factors You Need To Consider Before Applying for a Commercial Mortgage
Every commercial mortgage has its rates and repayment conditions, and the same goes with commercial lenders that have a specific way of assessing potential borrowers to finance them.
Your ability to qualify for a commercial mortgage depends on your income, credit score, type and health of a business, and debts.
✓ Down payments
Most commercial mortgages will require you to give a more down payment. Say, a multi-family rental, office, or retail property will require you a 25% down payment. On the other hand, industrial spaces will require a close 35% down payment.
✓ Interest Rates
Commercial property is remarkably pricy and is riskier for the lenders. So, you’ll expect higher interest rates in return, especially if the enterprise doesn’t meet a good score credit score or projected revenue.
✓ Processing Times and Processing Costs
Most commercial mortgages take about six weeks to 1 year to finish. The cost will have higher processing costs due to extra time and paperwork. Charging you around $2,000 – environmental report and $3,000 – for property appraisal. Consulting and employing an attorney or a real estate broker can help.
How to Apply for a Commercial Mortgage
1. Review your Business Finances
Go over to your books and finances to confirm everything is ready. Most commercial lenders accept established businesses, growing in size and with good profit. On the other hand, a bank would decline if you’re a business without a good income history.
2. Identify What Kind Of Financing You Want
t’s better to curate a detailed budget with all costs involved. That way, it will result in a better decision.
This is a common concern that most businesses forget to give serious value to. As a result, your lender may decline you.
3. Business Document Organization
Prepare the essential and relevant documents necessary for your application, such as.
• Recent business financial statement
• Commercial property information
• Details about your Management Team
• Business plan
4. Consult and Talk To Your Lender
Talk to your lender and show that your business can adequately handle the loan payments, fees, and interests during the amortization period.
Also, whenever you’re not totally prepared with your plans, it’s advisable to consult your lender before you go with the property.
Below are a few things you can discuss with them.
• What environmental and building condition assessment you should obtain
• What type of commercial mortgage does your business need
• What are the lender’s specific commercial financing conditions are
A commercial mortgage is a risky investment that can negatively affect your business if this is not handled well. Look at the considerations (LTV, Amortization period, and renovations) and information so you can come up with a better decision to avoid difficulty with the application process.