Basics Of Commercial Mortgage Loans
Commercial mortgage loans are totally different than residential mortgage loans. First of all, commercial mortgage loans are not regulated like residential mortgage loans are and the underwriting guidelines are different. Federal and state mortgage and lending regulators believe that those who are seeking commercial mortgage loans are sophisticated investors and are not regulated by Fannie Mae, Freddie Mac, FHA, or other mortgage regulatory agencies.
Commercial Mortgage Rates
Commercial lenders are risk oriented and normally charge higher mortgage rates than residential mortgage lenders and often only offer short term mortgage loans amortized over 20 years, 25 years, or 30 years. Commercial mortgage loans are normally due to expire in 3 years, 5, year, 7 years, or 10 years. They can adjust after the initial fixed rate period or the whole commercial mortgage loan will need to be either refinanced or paid for in full, also known as a balloon commercial mortgage loan.
Risks Associated With Commercial Mortgage Loans And Balloon Payment
There are many risks associated with commercial mortgage loans. Since there are no 30 year fixed rate commercial mortgage loans, commercial mortgage loans are only balloon mortgage loans where the whole loan is due after 3 years, 5 years, 7 years, or 10 years. After the end of this term, the whole loan comes due so the mortgage holder needs to either pay the whole mortgage off or needs to refinance the commercial mortgage loan. If the commercial property is not doing so well and is having cash flow problems prior to the maturity of the balloon payment, refinancing the property might pose a problem and foreclosure can be a possibility.
Institutional Non Bank Commercial Investors
Non bank commercial lenders normally have less stringent underwriting guidelines when it comes to approving commercial mortgage loans. There are commercial loan products from these non bank institutional lenders where they will make longer term mortgage loans without early maturity balloon payment clauses. Other commercial mortgage lenders will offer adjustable rate mortgages that are 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM which are amortized over 30 years and adjusts every year based on an index and a constant margin and adjusts every year after the fixed rate period is over throughout the thirty years. This might be a great option for commercial property owners who do not want to refinance the mortgage loan after the initial balloon period comes due.
Loan To Value And Types Of Commercial Lenders
Depending on the commercial properties, loan to value requirements differ from commercial lender to commercial lender. Certain apartment building commercial lenders can require different loan to value requirements depending on cities, state, or geograhical region and depending the class of the property. A class C property might require a 70% loan to value whereas a class B or A property might require 80% loan to value. Commercial loans under $3,000,000, are normally handled by smaller banks. Mid sixed loans between $3 million to $10 million, are normally handled by regional mortgage banks, credit unions, or a commercial investment syndicate. Larger commercial loans are normally handled by Wall Street commercial lenders or groups of larger banks and insurance companies.
How Do I Apply For A Commercial Mortgage Loan?
You can apply for a commercial loan going straight to the lender directly such as a bank or credit union or by hiring a commercial mortgage broker who normally has dozens of relationships with wholesale commercial lenders. The commercial lender will first take a look and analyze and process your income history and personal financial statements, balance sheet, and cash flow statements, and profit and loss statements of your business, commercial property, and yourself. Three years business tax returns and three year personal tax returns are required as well as bank statements. A good detailed letter of explanation on the borrowers history and the borrowers goals and the intent of applying for the commercial loan will be extremely helpful. The commercial lender wants to see the overall global view of both the property and the borrower/guarantors of the commercial loans. Assets, reserves, are extremely important and so is the borrower/guarantors resume and personal asset information and experience in the field.