A commercial mortgage is basically a loan taken out to cover the cost of the property in case you default. The borrower is generally a business, though partnerships and incorporated companies may also take out commercial mortgages. The type of business operating on the property must also be identified in the mortgage application since this will affect your credit score and commercial mortgage rates.
The Different Types of Commercial Properties
When considering a commercial mortgage, one should first identify the type of commercial property they are looking to finance. If a residential real estate property is purchased as an investment property, it can be financed by a commercial bank; there are three categories that are considered. The first is a residential property comprising between one and four residential units. The second is a residential property comprising between five and ten residential units. The third is a residential property that already contains one or more commercial properties.
The Qualification Criteria to Pursue a Commercial Mortgage
You will have to meet certain requirements to pursue a commercial mortgage. The bar is set quite high, as loans for commercial properties are considerably more valuable than those for residential properties.
Below are the usual criteria that you may have to acquire.
1. A Good Credit History
Most lenders will not loan money to applicants with poor credit scores or little business experience, or startup capital. However, there may be lenders willing to accept applicants with a less-than-perfect credit history. The requirements for getting a good credit score will depend on the lender’s standards. You will have to get a little used to the different lenders’ requirements while shopping for the best commercial mortgage rates.
2. A Profitable Business
If you own a successful business, commercial lenders expect you to be profitable and able to provide steady payments. You will likely provide them with your business plan and financial projections to prove that you have the money on hand to make your payments on time. Some lenders may have a minimum net worth requirement of about $100,000 to show that you are able to handle the loan. The money should be liquid, not in equity, so that you will use personal finances, cash, stocks, or other assets.
3. A Good Down Payment
Commercial property typically requires a larger down payment than a residential property due to the larger risk. A down payment on a mixed residential and commercial property usually falls between 20 and 35 percent of the purchase price, while a purely commercial property has a higher down payment requirement, usually near 50 percent.
4. A Debt Service Coverage Ratio
The loan-to-value ratio is the most important criterion lenders will look at when you apply for a loan. It is a way of determining the amount of money you need to borrow. Lenders will consider how much cash you have available to make your monthly house payments. The ratio tells them how much debt you can handle.
Overall, a commercial mortgage is another type of mortgage loan that can be obtained to purchase commercial property, and it is somewhat of a greater value than residential property.
Finding the right lender, the right down payment and the right type of loan will help you get the most out of your loan. These tips should help you navigate your way through the commercial mortgage process and ensure that you get the best possible rate and terms on the mortgage you require.
If you are looking for a reliable company that provides mortgage services in Ottawa, look no further than our expertise here at Ottawa Mortgage Services. We offer mortgage agent services for first-time home buyers, self-employed individuals, and commercial clients. We also help with refinancing, pre-approvals, and debt consolidation. Call us today and let us discuss all your viable mortgage options.