If you are harboring the dream of owning a commercial property, it is imperative that you get as much information about the procedure of obtaining a commercial mortgage. There are a lot of factors that lenders look at while reviewing an applicant’s request for commercial mortgage. In the following paragraphs, we will try to understand how commercial mortgages work.
The common reasons for buying a commercial property are concerned with setting up a new business. Although you may find the classifieds filled with offers on residential mortgage, deals of commercial mortgage are mostly done with the help of a broker. Also, the repayment terms of the commercial mortgage can vary significantly as compared to the residential mortgage.
A commercial mortgages also brings with it the need to get the property appraised for environmental concerns. As a result of all these factors, it is advised to take the help of professional service providers.
The reputation of your business, the amount you are putting down as down payment, and the terms and conditions of the lender, determine the rate of interest that is offered to you. The lender might offer you one of the following repayment plans:
• A fixed-rate repayment: In this plan, you will have to pay equal monthly installments for the tenure of the loan. The advantage of this plan is that it allows you to plan out your finances; however, the downside is that there is no change in payments when the rate of interest falls.
• Adjustable-rate repayment: This repayment plan has a lot to do with the changing and economic conditions in the world. A hike in the interest rates increases your monthly payments, whereas a drop reduces your monthly payments.
• Hybrid-rate repayment: Hybrid loans allow you to pay according to a fixed rate of interest for a couple of years or more, and then the plan changes to an adjustable interest rate.
• Balloon repayments: In this repayment scheme, business owners pay low monthly payments for the first couple of years or so, and after that the remaining amount of the loan is paid at one go. The premise of this scheme is that a business owner needs the maximum capital when he is starting out, and once he is able to establish his business and makes profit for it, he can pay off the remaining amount in a single payment.
Commercial lenders put applicants through additional scrutiny, as a result of which, the paperwork is a lot more comprehensive. Lenders look at certain factors to assess the risk of offering commercial mortgages. Lenders look at the loan-to-value ratio (LTV) and debt service coverage ratio (DSCR). LTV is a ratio of the mortgage amount required to the total appraised value of the property. If the LTV ratio is on the higher side, the lender may categorize the buyer as a high-risk, which can result into a higher interest rate. DSCR, on the other hand, is a ratio of the net operating income to the total debt. DSCR should be greater than 1, as it implies to the lender that your income/profit is significantly higher than what you need to make the mortgage payment.
One important thing that borrowers need to remember is that the building or the real estate for which the loan is sought acts as collateral for the lender. In case of a few missed payments, the lender can start foreclosure on the property. As we mentioned before, borrowers should keep all the important things in mind before signing up for commercial mortgage.
Read more@ http://ow.ly/sMSdX
No comments:
Post a Comment