Qualifying for an investment property loan is an entirely different process than the residential loan transactions you may have experienced in the past. As such, today we’re going to talk more about commercial lending and the steps you can take to increase your chances of securing a loan.
Have All Your Documentation Ready to Go
Lenders consider a number of factors when looking over commercial loan applications, and the more information you can provide, the better your chances for approval. Providing all necessary documentation at the beginning of the transaction can prevent delays from occurring down the road as well. Here are some examples of documentation you may need to secure a commercial loan:
● Projected cash flow
● Property appraisal
● Business plan
● Tax returns for the past five years
● Financial records and income statements for the past five years
● Personal and business credit reports
You'll Need Steady and Reliable Income
One of the most important factors commercial lenders will consider when you apply for a loan is your income and your net worth -- lenders review this information because they want to ensure you'll have enough cash flow to cover mortgage payments. Your funds could include personal income from a job, rental income from other investment properties, and any professional or business income that you generate. The critical number that they'll look at is your debt service coverage ratio, which is calculated by taking your net operating income and dividing it by your total debts.
Lenders Will Also Want to See Cash Reserves to Cover Emergencies
However, having enough money to cover your expenses won't be enough for most lenders, and many will also want to see that you'll still have cash reserves available after the down payment is made. In general, most lenders will want to know that you have 10 to 20 percent of the loan amount saved away on top of the down payment and closing costs.
Choose a Solid Investment Property
Another factor that's just as important as your income is the property in question. The value of the property is an essential factor lenders review when considering the size of your loan and the loan-to-value ratio. As such, you'll want to choose a property with a solid history of generating rental income.
There are many factors that potential lenders consider before approving a commercial mortgage, but the good news is that there are things you can do to increase your chances of approval. Your plans should include ensuring you have enough income and cash reserves, selecting a viable property, and having all the documentation you'll need ready to go. When you’re ready to apply, get your application started by contacting our team.