Sometimes it is helpful to know some basic pieces of information before you contact a bank, lender or broker seeking a commercial mortgage. The following are three very simple things to know about commercial mortgages that will hopefully steer you in the right direction.
1. It has to make sense
As funny as it sounds the commercial mortgage requests we get do not always make sense. Last week we received a request from two individuals that are looking to put together a land development. They do not have any equity themselves and are looking to borrow the money from a lender. They were under the impression that a commercial mortgage would be available for not only 100% of the purchase price but also 100% of the costs involved in developing the lands. Before proceeding with a commercial mortgage it is helpful to know what you are bringing to the table including income, equity and ability to make the mortgage payments and repay the mortgage.
2. Know your numbers
One of key numbers to know is how much equity you have in comparison to the total transaction size. This is known as loan to value or loan to cost. If you have 35% equity or are putting down 35% as a down payment on a commercial property your loan to value would be 65%. Most commercial mortgages funded by banks are done at 65% of the property value or purchase price. If you need more than 65% of the value of the property or purchase price then you should know that you are looking for a mid-market or private lender. If you visit a bank not knowing that they only approve up to 65% of a purchase price or property value you will be frustrated at the result and the time it takes to get an answer.
Another number to know is how income you have to make the payments. This is referred to as debt servicing. A bank or lender will need to see that income is available and can be proven to be enough to meet their criteria. Some banks want to see $1.30 of income for every $1 of debt. Other lenders are comfortable adding an interest reserve to their mortgage amount to service the debt. How are the payments will be made is an important piece of information.
Know how much financing you need and what type of bank or lender is the best match for your need.
3. Set reasonable timeframes
Commercial mortgages can take time to arrange and fund. Traditional banks can take as long as 90 days to fund a deal not so because they are slow but because they have a long list of documents and conditions that need to be met before funding. Even private lenders who can fund a deal in the same week they receive the request are at the mercy of appraisers, engineers, quantity surveyors, accountants and lawyers. Make sure you have enough time to arrange an appraisal, have an engineer review your budget (if applicable) and address the other items that will come up during the application and approval process. Many commercial borrowers don’t leave themselves enough time to get their request funded and have to make alternative arrangements such as bridge financing.
While there are many different variables and factors involved in a commercial mortgage, you can save yourself frustration by knowing that your deal makes sense, that your numbers work and that you have left enough time to get your deal done.
If you would like to get a quote and a checklist of the documents needed for your commercial mortgage, complete our Commercial Mortgage Application found on our website. We’d be happy to help.