Commercial real estate loans are an important source of capital for real estate investors and small business owners alike, and sometimes it’s necessary to secure these funds in order to get projects off the ground or see them through to completion. However, getting approved for a commercial mortgage is harder than it sounds, and some lenders can make it very difficult to secure financing. The good news is that there are a number of common reasons why loans get rejected, and if you know what they are before you begin the application process, then you can take steps to better ensure that your loan request will be approved.
1. A Poor Credit Rating or Insufficient Credit History
One of the most—if not the most—common reasons a lender will deny a commercial loan is because of bad credit. Lending money is a business, and the people handing out the money have measures in place to ensure they’ll actually get their investment back. Lenders will likely look at both your business financials and your own personal credit history when you apply for your mortgage, and if the numbers don’t add up, then you may get rejected, either because you have bad credit or because you don’t have a long enough credit history. Typically, most lenders look for a credit score of at least 650 when considering commercial mortgages.
2. Being Ill-Prepared
Lenders want to see a varying amount of documentation from potential borrowers, including things like W2s, personal and business tax returns, personal financial statements, business operating statements, and more. If you don’t have this paperwork in order and available, then there's a good chance a lender will reject your loan on the basis of low documentation. However, if you do manage to qualify for a mortgage without this paperwork, you likely won’t qualify for as attractive an interest rate.
3. Shooting Too High
The loan-to-value ratio is an important consideration for lenders because they want to make sure the property they're financing is worthy, and that you'll be able to afford it. For instance, if the lender requests an appraisal and discovers that the property isn't worth the price, then they may reject the loan on the basis of the real estate value. Similarly, if you can’t provide a down payment of at least 20 percent, the lender may also reject the application.
4. Lack of Available Cash Flow
You need to be making money in order to repay your mortgage, so any lender is going to look at your income and cash flow before approving a commercial loan. As long as your business is in the black and has steady money coming in, then you're more likely to have your loan approved. If, however, you can't prove regular cash flow, then you may be deemed high-risk.
5. No Assets to Secure the Loan
Collateral is an important factor that lenders may consider with commercial loans because they want a contingency plan in place in case borrowers default. Assets the lender may look for include vehicles, property, and investments. If you have insufficient collateral, the lender may not want to take the risk.
There are many reasons why a lender might reject a commercial mortgage, but credit rating, lack of documentation, bad loan-to-value ratio, low cash flow, and insufficient collateral are among the most common. If you’ve had a commercial mortgage rejected or are worried about any of these factors, contact InvestmentProperty.Loans today to discuss your options or apply for your loan.