3 Common Reasons for Commercial Loan Rejection

Before entering into the process of applying for a commercial loan, it’s imperative you learn from the mistakes of others and find out why your loan application might be rejected. Our team has many years of experience helping clients navigate the commercial loan process. In this new post, we’ll explain the top three reasons borrowers are rejected for their commercial real estate loans.

There Are Inconsistencies in Your Paperwork

When working with a financial institution and providing them with your information, you should ensure that all of the information you provide matches. That means if you have changed your address recently, you should make sure that the change of address is noted across all documents. 

Many prospective borrowers face rejection simply because they are not able to provide the documentation lender’s require. Real estate investors in particular can have difficulty proving their income through tax returns.

However, this type of documentation is not always required. If you partner with an alternative lender like Commercial Direct, a division of Silver Hill Funding, LLC, you can secure financing without ever having to produce tax returns.

You’re Taking on Too Much Debt

When a lender reviews your financials, they might decide that you are taking on too much debt and cannot otherwise afford to buy the commercial property. In this scenario, they will reject the application until you are able to prove that you can afford to make the payments. The issue might be that the debt is simply too large for your income or that they don't believe your business profile as a commercial client is accurate. It's important to find out as much as possible about the requirements of the lender before you begin the application process.

If the lender rejects your application because you are taking on too much debt, you may take the time to explore other avenues for generating income and show the lender that you are capable of paying the debt back within the term limits. That will help you to secure your loan and ensure that the loan payments are within a comfortable range for your income.

You’ve Had a Recent Change in Employment

The lender will look to your employment status as a means to judge your ability to pay back the loan over time. If you have had a recent change in employment, having lost a job or otherwise changed jobs while going through the process, the lender might decide to reject the application. Try to be as upfront as possible with your lender when applying for the commercial mortgage. Ensure they recognize your employment position and any changes that occur during the application process.

Your Credit Score is Too Low

Every lender is different, but all set minimum credit scores for commercial transactions. You can typically find this information easily, either by reaching out to a lender or checking their website.

You can also get a general idea of a lender’s requirements by understanding where they fit in the lender spectrum.

Banks are generally the most conservative when it comes to acceptable credit scores, while alternative lenders may be far more forgiving.

As an example, Commercial Direct sets their minimum FICO score at 650.

There are Clear Issues with the Commercial Property

Many common reasons for lender denial have to do with the commercial property in question. Here are a few common issues borrowers can face when trying to secure financing:

  1. The property needs significant repairs

  2. The investor recently purchased the property and is now hoping to refinance

  3. The property has few tenants

  4. The property is located in a rural area, far from potential tenants

  5. The property’s makeup or location creates environmental concerns

These and other issues are difficult to overcome for prospective borrowers.  But partnering with a lender that believes in flexibility will certainly help.

Our experienced team is here to help guide you in successfully applying for a commercial loan. To discover more about this process and to speak with one of our team members, please call us today. Trusted advisors are just a phone call away.