Will I qualify for a commercial loan?
Due to the huge losses suffered by commercial lenders during the Great Recession, banks are much more difficult to manage when they buy commercial loans today. Do you want to qualify? Everything depends on the three pillars of the subscription: credit, repayment capacity and guarantee. Let’s look at the credit first.
Commercial banks are the lenders with the largest number of commercial loans today, and banks need good credit. You will usually need a credit rating of at least 680, and a credit score of over 700 is greatly preferable. Now, if your credit score is below 680, do not panic please. We recently convinced a bank to approve a commercial loan for a veterinarian with a seizure of his file (due to a divorce) and a credit score of only 630. And even if a bank does not take care of your case, there remain Wall Street risk lenders and hard-core commercial mortgage lenders willing to make risky business loans.
Bank guarantees the repayment capacity of a commercial borrower
When a bank guarantees the repayment capacity of a commercial borrower, it focuses primarily on the cash flow of the property. Net operating income from commercial real estate must be at least 25% to 45% higher than the proposed commercial mortgage payment. In commercial financing sector jargon, the debt service coverage ratio should exceed 1.25 to 1.45. The conduit lenders also require the debt yield ratio (any new underwriting ratio) to exceed 9.0% to 10.0%.
Commercial lenders also require more collateral today.
In 2006 and early 2007, commercial lenders would regularly approve commercial loans with a 75% borrowing rate. Many commercial lenders have even contracted commercial loans up to 80%! Then commercial real estate fell by 45% and commercial lenders were hammered. They took huge losses. As a result, immediately following the Great Recession, most commercial lenders reduced their loan value from 75% to 58% to 65%.
Fortunately, the banks have finally started to relax a bit. This means that it is usually possible to obtain from a bank a conventional commercial loan up to 70% of the loan / value ratio. Sometimes, banks even consider a commercial loan of up to 75% LTV again, but the transaction will have to be very strong. You are more likely to benefit from a commercial loan with a profitability ratio greater than 70% if the transaction is a cost transaction (in other words, you buy the property). Another way to approve low solvency contracts is for the borrower to have many liquid assets, such as cash in the bank and marketable securities.
A final important point about qualifying for a commercial real estate loan with a bank. There are more than 5,000 banks in America, and all are extremely volatile. One day, a bank will even refuse to consider a commercial loan above 65% of its loan-to-value ratio and yet, a month later, the same bank will close a commercial loan of 75%. What happened? The bank suddenly relaxed because it was too liquid and she felt obliged to put money back on the street. To do this, you must address your commercial loan application to many banks.