Commercial Real Estate Loans – 12 Problems to Avoid
Seeking a commercial real estate loan seems to be a good and convenient option for making a decent investment in real estate but there are a few things that must be kept under consideration in order to do it right. Keeping that in view, 12 different problems that need to be anticipated by the borrower before getting such a loan are listed below for your convenience.
- Stated Income and Tax returns
Majority of the lenders provide their money to borrowers with a tax return history comprising of several years. In case you don’t have one, get your loan from stated income lenders who don’t verify personal assets or incomes.
- Special purpose properties
It is getting hard and hard to get a loan for a special purpose property such as assisted living facility, funeral home or a church. Therefore, it is important to find a lender who offers such loans before it is too late.
- Balloon features
Several banks use balloon features for shortening commercial loans to 3 to 7 yrs.
- Short term loans
It is recommended to avail a short term loan since it is free of balloon features.
- Up front charges
See if your lender asks you for any up front charges in order to avoid any inconveniences later.
- Business plans
It is recommended to go for a borrower who doesn’t need business plans.
- Cross collateralization
Go for a borrower that doesn’t need you to name your personal assets as a collateral for your loan.
- Ownership seasoning
It is recommended to find a borrower with no seasoning and sourcing limitations/requirements.
- IRS form 4506 requirement
If you don’t have the right history on account of tax returns, it is advisable to go for a stated income lender who doesn’t need you to sign the IRS form 4506.
- Debt Service Coverage Ratio
Majority of the lenders need a DSCR lying in between 1-1.2.
- Minimum loan size
Majority of the lenders have a minimum loan size requirement that is somewhere in between $0.5-$1 Million.
- Loan processing length
3-9 months are usually taken by traditional banks for closing commercial mortgages.