Borrowing money to finance the purchase of a commercial property is not the same as applying for a home mortgage. Lenders have different lending criteria and interest rates will be different. If you are considering applying for a CRE loan to finance a property acquisition, read on for a guide to the world of CRE loans.
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Loan Qualification
It is much harder to get accepted for a commercial loan such as a CRE loan. Lenders will want to see evidence of good cash flow, a good credit score, and more. These days, lenders use automated underwriting software that automatically checks all this against commercial databases, so they can provide a quick lending decision.
It is best to check the lending criteria before you apply, as too many rejected loan applications will impact your credit score, making it harder to qualify for other CRE loans.
Interest Rates
Expect the interest rates on commercial CRE loans to be higher than what you’d expect to pay on a home loan. In addition, whereas you will find plenty of fixed-rate deals when shopping for a home mortgage, commercial lenders are more likely to offer you a variable rate product. This means the interest rate will be adjustable.
Shop around for the best deals on the market and consider using a loan broker to help you find the best products.
Higher Loan Fees
Lenders charge fees for setting up a loan, and commercial real estate lenders are no different, except they charge more. CRE loan fees can be high, sometimes in the region of $10k or more. This is often a reflection of the value of the loan, so if you want to borrow in excess of one million dollars to finance a real estate deal, you can expect the fees on the loan to be quite hefty in view of the risk to the lender.
It’s important to note that lending fees are a business expense, so they can normally be claimed against income on your tax return. Speak to an accountant for more information. In addition, if your cash flow isn’t great, it is usually possible to add the loan fees to the loan itself but remember you will have to pay interest on the extra amount.
Defaulting on the Loan
One area where CRE loans differ from home loans is that the lender has recourse to go after all your assets if you default on the loan. They can sell the commercial property you borrowed against to pay off any outstanding sums owed, but if this doesn’t settle the debt, the lender can seize any other assets you own, such as your home, vehicles, other properties, and more.
Terms and Conditions
Check the Ts&Cs of the loan before you sign. CRE loans often have an in-built balloon payment, which means the balance of the balloon payment will fall due on a specific date. There is also likely to be a penalty for early repayment of the loan within the first few years.
CRE loans are more complicated than home loans, and also riskier. Always seek professional advice before you apply for a CRE loan.
