Applying for commercial mortgages or multifamily investment property loans isn't a difficult thing to do, but the process is complex, and there are a number of factors a lender will consider when judging your application. The three most important categories a lender will examine are the property itself, the borrower, and the business and income that the property can generate.
By looking at these three areas, lenders can get a good idea of the type of risk they're taking, and hopefully satisfy themselves that the mortgage will be paid back. Lenders only take calculated risks, and by looking at the property, borrower, and business, lenders are doing their due diligence before approving a commercial loan.
Factor Number One: The Property
The first—but not necessarily the most important—factor lenders will look at when considering a commercial or multifamily investment property loan application is the property itself. Because the property is the investment, they want to make sure it’s a sound one. One factor they’ll consider is the location, because properties in rural areas tend to be higher risk than ones in urban areas or metropolitan cities. Beyond that, they’ll also examine the condition of the property and assess the value, because a property that’s in good condition has much more potential than one that’s older, run down, and in need of repairs. Essentially, the lender will want to make sure the property has a good loan-to-value ratio before approving a commercial mortgage loan.
Factor Number Two: The Borrower
The second thing a lender will look at is you, including your personal and financial history, in order to assess what risk you pose when purchasing or refinancing commercial loans. Again, lenders want to ensure they’ll get their money back and to determine that they’ll look at your track record when it comes to money, responsibility, and paying off debt. One important factor they’ll consider is your credit score. Although higher is always better, they’ll typically look for credit score of 650 or above. Beyond that, they’ll also want to know what size of down payment you have, which should be at least 20 percent. Other factors they’ll consider include your:
- Cash liquidity
- Income (capacity)
- Net worth
- Other capital and assets
- Collateral that can be used to secure the loan
Factor Number Three: The Business
Finally, the third factor a lender will consider before approving commercial or multifamily investment property loans is the business or the amount of potential income the property will be able to generate. For instance, if you were looking to purchase a multifamily dwelling, then the lender would look at how many units there are, how much rent is, what other fees and charges the property would generate, and how much rental and other income the property could make on a monthly or annual basis. Again, this is because the lender wants to make sure the investment is sound and that you'll be making enough money through the property to repay the mortgage. Here are some things the lender may look at from a business standpoint:
- The type of property (residential, commercial, industrial)
- How the property generates income
- The lease and occupancy history of the property
- Your ability to manage the property
The three main factors a lender will consider when approving commercial mortgages are the property, the borrower, and the business, and this is because they want to ensure you'll have the means to repay the loan. All three elements have to pass muster, but there are many things within these categories that lenders will review. If you’ve found the right property with the right business model, be sure to apply today to find out what you can qualify for now.