What To Consider When Applying For Commercial Mortgages
by:
Anjitha Sakthidharan
A commercial mortgage is a loan made using real estate as collateral to secure repayment. In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages.
Some commercial mortgages are non-recourse, that is, that in the event of default in repayment, the creditor can only seize the collateral, but has no further claim against the borrower for any remaining deficiency. Frequently, the mortgage is supplemented by a general obligation of the borrower or a personal guarantee from the borrower, which makes the debt payable in full even if foreclosure on the mortgaged collateral does not satisfy the outstanding balance.
Common applications of commercial mortgage loans include acquiring land or commercial properties, expanding existing facilities or refinancing existing debt. Common commercial properties are zoned for office, retail, & industrial purposes.
Commercial premises are purchased for many reasons. One may require bigger premises to cope with expansion, or you may be buying property, whereby the property is directly linked to a business e.g. a hotel. Commercial Mortgages are usually made with terms less than 10 years, but may be much longer than this. The Property itself is usually at risk if payments are not made on time. Hence, the lenders will look at the value and quality of the property being purchased, and its ability to bring in revenue.
Most banks and building societies offer commercial mortgages, but you must satisfy the lenders criteria for qualification. The primary criterion is the debt service coverage ratio or the ratio of cash available to the required loan payments. Some lenders may accept applications where there is an adverse credit history, but most require a positive personal credit rating and clear evidence that your business is creditworthy. Most will apply a loan-to-value ratio and will expect you to invest a proportion of your own money into the purchase.
Interest rates for commercial mortgages are usually higher than those for residential mortgages. The most common commercial mortgage is a fixed-rate loan, where the interest rate remains constant throughout the term. This must not be confused with the typical residential loan which uses the term to denote a 30 year term mortgage that comes with a rate fixed for 30 years. Most commercial loans have fixed periods between 3 and 10 years.
As the procedures of commercial mortgages are complicated, you may want to use the service of a mortgage broker. Although brokers do not finance home loans themselves, working with a mortgage broker gives homebuyers the opportunity to receive multiple offers from different lenders. Additionally, brokers have access to many types of loans. Thus, persons with a low credit rating can also obtain quotes from different lenders offering bad credit mortgages.
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