How to Get the Best Interest Rate for Your Commercial Mortgage
Commercial mortgage borrowers often ask us how lenders determine the rates they offer on commercial mortgage loans. There are many criteria that lenders use when determining 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 underwriters.
– Qualifications of the borrower. Lenders will analyze the net worth, liquidity, cash flow, credit history, and real estate experience of a borrower or guarantor to determine overall risk. Lenders like to see borrowers with good records as similar property owners and managers. They want to see enough cash reserves to cover unexpected problems that may arise, and they hope to see that borrowers have a good record of paying their bills in a timely manner.
– 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 small rural areas. Good properties in good locations are easier to rent in the event that tenants move out 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 retail properties. Lenders don’t like vacancies, high turnover rates, and properties in a state of constant flux. Lenders like to see well-managed properties that attract and retain long-term renters
– Stabilized occupation. Lenders look for properties that have enjoyed high occupancy levels with minimal disruptions for the past 2-3 years. Properties with vacancies and fluctuating rental histories are considered higher risk. Lenders will request performance statements for the past 2-3 years. They expect to see steady occupancy and an increase in net income. Properties that fluctuate wildly with income and expenses will raise many 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 reserve or collateralize funds for repairs and maintenance. Properties in poor condition tend to perform worse than well-maintained properties.
– To take advantage of. Loan-to-Value is very important in determining risk. A loan with an LTV (loan to value) of 50% will be priced better than a loan with an LTV of 80%. If a property experiences difficulties, there is much more room for error in low-leverage loans.
-Debt coverage. Refers to the excess of 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 losses.
At the end of the day, lenders don’t want to expose their lenders to undue risk. A borrower should be prepared to address all of these issues to the satisfaction of the lender at the time of application in order to increase the chances of obtaining approval for a loan at the lowest possible rate.
Once you are qualified for a commercial home loan, it helps to get an idea of your proposed monthly payment in advance. A commercial mortgage calculator is a very useful and useful tool. Whether you’re buying a new commercial building or refinancing an existing business loan, it helps 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 asked to enter the loan amount, the number of years, and the interest rate. The mortgage calculator will calculate your monthly payment.