How to get the best rate on your business mortgage
Commercial mortgage borrowers often ask us how lenders determine the rates they offer on commercial mortgage loans. There are many criteria lenders use to determine rates, but lenders will assess the relative risk of a loan when reviewing a loan application. The lower the risk, the lower the rate. The higher the risk, the higher the rate. It is important to understand what factors are important to lenders and insurers.
– Borrower qualifications. Lenders will look at a borrower’s or guarantor’s net worth, liquidity, cash flow, credit history, and real estate experience to determine overall risk. Lenders like to see borrowers with a good ownership and management history of similar properties. They want to see enough cash reserves to cover unexpected problems that may arise and they hope to see borrowers have a good track record of paying their bills on time.
– Location and market of the property. Good quality properties in large metropolitan and suburban areas are considered lower risk than inferior properties and properties in smaller rural areas. Good properties in good locations are easier to rent in the event that tenants move or in situations where the remaining lease terms are short. For example, if a property in a poor location becomes vacant, it will require a significant amount of renovation to attract new tenants.
– Maintenance mix. Multi-tenant properties with good quality tenants and long-term leases are highly desirable when financing office and commercial properties. Lenders don’t like vacancies, high turnover rates, and ever-changing properties. Lenders like to see well-managed properties that attract and keep long-term tenants.
– Stabilized occupation. Lenders look for properties that have enjoyed high occupancy levels with minimal interruption for the past 2-3 years. Properties with vacancies and fluctuating rental histories are considered higher risk. Lenders will request operating statements for the last 2-3 years. They expect to see consistent occupancy and increased net income. Properties that fluctuate wildly with income and expenses will raise a lot of questions.
– State of the Property. Properties in good condition with little deferred maintenance are considered lower risk than properties in need of major capital improvements. Properties in poor condition will generally require the lender to set aside or deposit funds for repairs and maintenance. Properties in poor condition tend to perform worse than well-maintained properties.
– Leverage. Loan-to-Value is very important in determining risk. A 50% LTV (loan to value) loan will be priced better than an 80% LTV loan. If a property experiences difficulties, there is much more room for error in low leverage loans.
-Debt coverage. This refers to the excess in net operating income over annual mortgage payments. The more excess cash flow a property produces, the lower the risk. Excess cash flow can be used to mitigate turnover, repairs, or other cash leakage.
At the end of the day, lenders do not want to expose their lending institutions to undue risk. A borrower should be prepared to address all of these issues to the lender’s satisfaction at the time of application to increase the chances of getting approved for a loan at the lowest rate possible.
Once you qualify for a business mortgage loan, it’s helpful to have an idea of your proposed monthly payment up front. A commercial mortgage calculator is a very useful and helpful tool. Whether you’re buying a new commercial building or refinancing an existing business loan, it’s helpful to know how much of a loan you can afford at current rates. A commercial mortgage calculator will calculate your monthly payment for you. You will be prompted to enter the loan amount, number of years, and interest rate. The mortgage calculator will calculate your monthly payment.