The Ultimate Guide To Commercial Mortgage Lenders
If you want to expand your business, or renting commercial premises has become too expensive, I’m sure you’ve realized that it’s time you invested in a property. It’s most likely that you’ll be considering to explore the wide variety of commercial mortgage options provided as a potential source of finance for your business and you’ll soon find out that there’s much you need to understand. Luckily, Neal Business Funding is the right place for you. We’ve put down this guide to help you know more about commercial mortgage lenders, but first, we’ll take a look at a few things you need to understand about a commercial mortgage.
Key Points to Remember About A Commercial Mortgage
Once you have a commercial mortgage, you won’t have any unexpected or sudden rent increases, but you could expect monthly repayments to increase if you got a variable rate deal. However, you might be in a position to have a fixed rate mortgage for a specified time. In case the property’s value appreciates, your business capital will increase; a commercial mortgage’s interest repayments are deductible. Perhaps you could rent a certain part of the premises to another willing company as a way to assist you in reaching those monthly repayments, that is if your lender agrees to this kind of arrangement.
When it comes to repayment options, they are just the same as those offered in the residential market; however, there’s often a fairly higher rate of interest, since commercial mortgages are seen to be of high risk. To eliminate this risk, it’s prudent that you have the largest deposit you can, preferably more than 20%. Apart from the legal, standard valuation, and arrangement fees, there might be extra charges related to a commercial mortgage, so it’s recommended you seek consultancy from a lender or broker.
There’s plenty of commercial mortgage lenders out there, from the likes of main street high banks to others like specialist lenders. Therefore, it’s essential you do a thorough search in the market to find one that well-suits you and your needs, for the right price.
Commercial Mortgage Lenders
There is a wide variety of lenders providing commercial mortgages, each with their own advantages and disadvantages.
- High-street Banks
If you’re eligible, you already know the obvious pros when it comes to major banks are that their rates are just the best. Mostly, they’ll lend against the Open Market Value (OMV) and provide quite high Loan-to-value (LTV), which means you might receive a sizeable mortgage, and the major banks are more inclined to have shorter and less arduous tie-in periods.
The cons with high-street banks are that their criteria can be somewhat impossible to satisfy. They require a slightly high Debt service coverage ratio (DSCR), which means you will require to have a higher income to be able to service the same debt amount than you would with other mortgage lenders; if you have issues with recent credit, they’ll often reject your application right away. Also, a commercial mortgage application process takes a long time with the banks; decisions usually take more than a few months.
- Challenger Banks
Generally, these challenger banks have a greater enthusiasm to do business and can offer assistance to some businesses that failed to get some help from their high-street cousins. To start with, their Debt service coverage ratio (DSCR) requirements are often lower, which means their commercial mortgage’s income threshold can be easier to reach. Also, they will take a look at applications that have credit concerns in the last two years, a thing that major banks won’t often do.
Sometimes these banks provide interest-only repayment alternatives up to the highest LTV; this makes more sense for those businesses that purchase their premises for cash reasons instead of capital gains. For instance, when the interest-only mortgage payment offered is less per month compared to their present rental payments.
The drawbacks of these challenger banks come down to flexibility and cost. Generally, they’re costlier compared to the high-street banks, and will mostly have higher exit fees for the mortgage duration, which may reduce your options in case you have an uncertain future. Also, challenger banks may agree to the commercial mortgage amount on the basis of a 180-day marketing period instead of the OMV, which can potentially limit the amount you can receive.
- Niche Lenders and Specialists
The smaller specialist lenders are generally much more flexible when compared to both high-street banks and challenger banks. If you want to apply for a commercial mortgage, but you have been out of business for a while, the niche lenders may be the most suitable option for you; this is because they are mostly ready to lend to somewhat shorter trading histories and have a relatively lower affordability criteria (DSCR). At times, it’s also possible to use projections rather than trading history, especially if they’ve been signed off by a professional accountant. Furthermore, specialist lenders may be more flexible when it comes to location, considering mortgages applications from most surrounding areas and at times, even offshore territories.
As you might know already, the cost is the major disadvantage with these types of lenders since they are often more expensive mortgages compared to what you’ll find in the banks. The smaller lenders tend lending against the Forced Sale Value (FSV) as well, which is often lower than the Open Market Value and thus can significantly lower the percentage of the value of the property you can borrow.
Also, they’ll have longer terms and more limiting exit fees. A simple illustration, you might have an 8-year tie-in period on a 10-year mortgage with 2-6% range of exit fees, which is significantly more limiting than the banks. Keeping that in mind, if your position means you are only qualified for the specialist lenders, it’s irrelevant to compare with major banks.
What Do I Need?
- Eligibility and Criteria – Your trading history matters when it comes to finding a business mortgage. Mortgage lenders want to be assured that you can not only afford the mortgage, but you can also repay it. If you own a limited company that’s presently trading, you’ll require a minimum of 3 years of filed accounts to qualify for mortgage application in the high-street banks, and a minimum of 2 years of accounts for the challenger banks.
- Security – Lenders usually require security when providing commercial mortgages, it assists in lowering their risk when offering large mortgages for warehouses, offices or other commercial premises.
Factors to Consider When Choosing a Commercial Mortgage Lender
Finding a reliable mortgage lender doesn’t just involve getting a reasonable interest rate, you’d rather work with the greatest commercial mortgage lenders, staffed by professionals who can guide you through the entire process. We’ve listed some tips that can assist you in hunting for a reliable mortgage lender.
- Make Sure Your Credit Score Is In Shape
To purchase a home, there are some qualifications you have to meet, including specific credit and income criteria to prove to mortgage companies that you can indeed repay the loan. With a low credit score, it will indicate that there’s some risk in lending to you, which means your home loan will have a higher interest rate. A higher credit score plus making more on-time payments gives you more power to negotiate for more suitable rates with potential lenders. In general, if your score falls below 580, you’ll have a hard time being eligible for most types of mortgages.
- Understand the Lending Landscape
Studying the major lenders will assist you in navigating the congested lending field. Some of the most popular types of home lenders include mutual saving banks, savings and loans, correspondent lenders, mortgage bankers, and credit unions. Also, make sure to find out that all the clients you consider are licensed by the specific state where you are.
- Get Preapproved
Having a mortgage pre-approval letter before checking out the houses will help you get prepared for bidding against other potential buyers. With the letter, the seller will be more convinced that you’re a serious buyer whose loan repayment isn’t going to be much of a problem. It’s proof that a lender has analyzed your finances and found out how much you qualify to borrow, and thus how much house you can get. Also, being approved now will save time eventually. When you’re prepared to make a suitable offer on the house, mortgage lenders will already have the necessary information to process your home application loan quickly.
- Compare rates with Other Mortgage Lenders Available
Start by searching for the most suitable rates online. Remember that the rate quote listed online is just but an estimate. A professional lender or broker will be required to assess your credit information and examine a loan application to give you an accurate rate, which you could accept if you are satisfied with the product.
If you want to have great financing options to expand your business, get in touch with Neal Business Funding right away, and our professional team will gladly assist you in achieving your goals.