Commercial Property Loans 101: How Do They Work?

January 25, 2021

Commercial real estate is an $889 billion industry worldwide.

Do you want to purchase a new business property but don't have enough money for that? Worry no more. A commercial property loan would be an ideal solution.

Commercial property loans are used to buy new business facilities or renovate old ones. These facilities can include an office, a warehouse, a school, a supermarket, a rental apartment, and so on.

The loans are easy to get if you understand them and meet the required criteria. Here is everything you need to know about them.

How They Work

Commercial real estate loans are meant for those who need to buy, expand, or renovate their income-generating businesses. The loans are secured by liens, meaning that the creditor uses them as security for the loan.

Since the loans involve substantial amounts, the lender must be sure that your property is worth investing in. Some of the things that the lenders consider before giving out the loan include the age of the commercial property, its current condition, and market value.

The lender uses that information to calculate the amount of commercial property loan you get. Some lenders require the borrower to own at least 51% of the property if it's a rental property and pay a 20% to 30% down payment for the loan.

The Repayment

Commercial loans come in two main repayment terms: short term and long term. The short-term property loans should be paid within three years. The long-term loans have repayments duration of 5-30 years.

The Interest Rate

The interest rate for commercial property loans depends on your creditworthiness and the nature of your property. The rate also depends on your lender.

Be sure to compare the rates for different lenders before applying. The average interest rate should range from 3% to 6%.

Other Costs

You must consider other fees when applying for a commercial property loan, besides the interest rate. Such expenses include the upfront application costs, property appraisal costs, and survey fees.

You might also incur a prepayment penalty if you make the payment too early. Your lender should reveal all the costs before the application so that you can budget well.

The Qualifications

Like in other mortgages, the qualifications vary significantly according to the lender. But, there are general things that every lender checks.

The first one is the credit score. Both your personal and business credit scores must be excellent for you to qualify for the loan. The lender must ensure that you don't have defaults, court judgments, or tax liens before getting the loan.

Know Where To Apply for Commercial Property Loans

Now that you know the basics of commercial property loans, you should also know where to get them.

Small business administrations, financial institutions, credit unions, and other reputable lenders can help you get this type of loan. Review the available lenders and choose the best fit for your needs.

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