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4 Ways Your Finances Affect Your Commercial Mortgage Rate

by  | Corporate
Posted:     Updated: Dec 7, 2017  12:35 ET
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The commercial lending process can hold some unexpected surprises for first-time commercial loan borrowers who may only be familiar with the residential lending process. One of the biggest surprises is how a borrower’s finances, and just as important, the property’s finances impact a borrower’s prospects with conventional commercial mortgage lenders.

Residential mortgage lenders usually only consider a handful of factors in the underwriting process to determine whether a borrower’s financial profile meets the lending institution’s guidelines. Generally, a borrower’s down payment, income history, credit score, and debt-to-income ratio can reliably indicate their ability to take on a residential loan.

Commercial real estate loan rate factors are a bit more complicated

Commercial property owners have many more factors that impact their ability to qualify for a commercial loan. Even if you fall within a commercial lender’s underwriting guidelines, you may end up being saddled with a higher commercial mortgage rate (just like with residential mortgages or auto loans) because of other factors that a lender may feel increases their lending risks. For instance, the type of commercial property, its financials and future potential, as well as the property’s condition, are all factors that will affect a borrower’s rate.

In many ways, your commercial mortgage rate reflects not only how worthy of a borrower your bank considers you to be, but whether the commercial property is a quality asset that can sustain itself for the loan term.

You shouldn’t get caught off-guard by your financials when it comes time to apply for a commercial real estate mortgage. Let’s check out the 5 ways your personal finances can impact your mortgage rate.

4 Ways Your Personal Finances Affect Your Commercial Loan Rate

1. Credit Score

Whether you’re seeking a residential mortgage, a commercial mortgage, or even a personal loan, your credit score is a mainstay of conventional bank underwriting—and for good reason. Credit reporting agencies take many factors of your financial history into consideration, such as bankruptcies, foreclosures, liens, late payments, and overall debt exposure.

These factors all potentially indicate what kind of borrower you are, and therefore, how “likely” you are to repay your credit debts. While your credit score may technically meet a conventional lender’s underwriting guidelines, it may also result in a higher commercial mortgage rate.

2. Income and Expenses

When lending on a commercial property, commercial mortgage lenders want to see that you, your business, and/or the income-producing property is producing enough income to sustain itself. For example, if your multifamily commercial property is at 50% occupancy, its income is going to be severely constrained, which will negatively reflect the property’s lending attractiveness. When you have a property with vacancy levels that are greater than the surrounding area, a lender has to wonder what is causing that to happen. Is it mismanagement by the owner, the property’s condition, or possibly environmental factors in that area? All these possibilities would be red-flags to a conventional lender.

Furthermore, a property’s operating expenses play a key role that affects a property’s net operating income (NOI) and debt coverage ratio (DCR). Properties that have operating expenses above what is considered normal for a particular property type and area can be a red flag. Conversely, lower than expected expenses can raise eye-brows as well. It can mean that a property owner is not maintaining the subject property enough. In this circumstance, if the property condition is generally acceptable to the bank, they may use higher pro-forma expense numbers in their underwriting and loan analysis.

Investment Properties with income and expense that may present a lender with additional risk concerns can affect the end commercial interest rate offered.

3. Financial Statements

When it comes to commercial property financing, Banks typically do not accept stated information about a borrower’s and a property’s financial history — they want thorough documentation. This presents a problem for many prospective borrowers who assume their credit score and stated income are enough. Full documentation of your financial situation, including tax returns, bank returns, disclosures, entity filings and other important financial summary documents, are all necessary parts of the bank underwriting review process.

Remember, lenders are looking to mitigate the risk they’re taking on. The more proof they have of a borrower’s strong financial background, the more likely they are to approve a loan—and the more likely that loan will carry a favorable interest rate.

4. Reportable Liquid Assets

Showing liquid assets are arguably more important in obtaining a commercial mortgages than they are for residential mortgages. Liquid assets held in checking and savings accounts and certain other accounts can be used by residential borrowers for down payments — but bank lenders often have other factors in mind when evaluating a borrowers liquidity, such as cash impounds, reserve requirements, a minimum amount of seasoned liquidity, and deposit relationships.

A lack of reportable liquid assets can damage your chances of securing a commercial mortgage entirely — and if you’re approved, can negatively affect your commercial mortgage rate (especially in the case where a bank may want the borrower to have a depository relationship with the bank).

What to Do if Your Finances Affect Your Mortgage Rate

To mitigate risk, traditional commercial lenders have developed a robust set of qualifications to determine whether they’ll ultimately extend a commercial loan. From there, usually only “A Credit” commercial borrowers will receive a bank’s lowest commercial rates.

If time or circumstances prevent you from securing your ideal rate, you may instead be able to secure alternative financing. For example, at Riverdale Funding, we use asset-based lending for real estate and base our lending decisions on the value of the underlying property, not on financial statements or a credit score. We want to make sure your commercial mortgage works for you, so we use common-sense underwriting to ensure you have a loan that fits your situation. While many alternative financers do carry higher rates due to the increased risk they’re taking on, our borrower-friendly lending guidelines help borrowers who may not have the financial history necessary to secure a good rate with a commercial lender—or a loan at all.

This article is a part of our Getting a Commercial Loan: Complete Guide, a comprehensive resource for anyone looking to secure a commercial loan. Read more at the link.

Topics: Commercial hard money | Commercial lending
More by: Riverdale Funding


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4 Ways Your Finances Affect Your Commercial Mortgage Rate

by Riverdale Funding | Corporate
Posted: Dec 7, 2017  12:34 ET    Updated: Dec 7, 2017  12:35 ET

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