Determining Factors In Commercial Investment Property Loans
by bill
Filed under Commercial Lending Information
Commercial investment property loans have many determining factors for approval. If you understand these factors and do your research, you can guarantee acceptance for your loan. Like all lenders, commercial investment property lenders worry about foreclosures, especially in today’s economic climate. While this may mean more stringent lending policies, it doesn’t mean that there isn’t any financing available. You need to know what factors banks consider when approving a loan and make sure you meet their criteria. These factors include LTV, down payment, income possibilities, and occupied vs. unoccupied properties.
Loan to value ratio (LTV) is the difference between the appraised value of a property versus the size of the loan you are request for that property. It is one of the risk factors lenders account for when reviewing a loan request. Higher LTV loans typically have stricter qualifications than lower LTV loans. So if the property is worth $150,000 and you are looking for an $110,000 loan then you have a better chance of getting approved then if you are looking for a $130,000 loan. This is because if a borrower defaults on a high LTV loan, the lender assumes a greater risk of losing money even if the property is resold.
As with traditional loans, if you are able to make a large down payment then you stand a better chance of getting a loan approved. A large down payment lowers the LTV of the loan you are requesting which lowers the overall risk to the lender. With a large down payment and low LTV, even high risk borrowers, such as those with a poor credit rating, stand a better chance of being approved. In some cases, collateral) such as another commercial property, can be used to secure a loan in lieu of a down payment. Collateral can also lower the LTV in some cases, depending on the lender.
The income generating ability of a commercial property is also considered. A lender looks at how much the property will generate on a monthly basis versus the monthly mortgage payment. A ratio of 1:1 or 1:4 is considered acceptable by most lenders. This means a property should generate $1.40 in income every month against every dollar owed. The better the ratio, the more likely the borrower can afford the monthly payment. Again, this lowers the risk of the investment, making it easier for even high risk borrowers to receive financing.
Commercial investment property loans that involve occupied properties can also help secure a loan. As with residential rental properties, commercial buildings with several existing tenants can help meet monthly mortgage obligations. An office building or shopping center that is filled with businesses has a better income generating ability than an empty building or one with a high turnover rate. Whether you have good credit or poor credit, you need to determine how much you want to borrow, what the loan is for and your income generating ability. These factors really are no different than a standard loan, so keep the same caveats in mind to guarantee success.
