Commercial Mortgage
Commercial mortgage, requirements and criteria
Unlike residential mortgages, which for the most part, have solid subjective requirements and structures for financing, the commercial financing requirements vary and are considered on a case by case basis. When it comes to residential lending, most of the criteria falls on the borrowers, where as with the commercial market, a bulk of the criteria which needs to be met falls on the property itself.
Here's how it works:
Type of commercial properties:
First, let’s see what are the main types of commercial properties in general:
- Multi residential buildings ( Any building with more than 5 rental units)
- Plazas and Retail stores
- Mixed-use (combination of store fronts and residential apartments on the upper floors)
- Industrial buildings, Storage and warehouses
- Malls and shopping centers
- Gas stations
- Hotels and other hospitality buildings
- Land acquisitions
- Development / construction financing
Underwriting criteria:
Except for the land acquisition and development financing, the main criteria for financing the other commercial properties is based on the annual income each property produces. So what do we mean when we say "annual income each property produces"? Commercial Properties can generate income in one of two ways, either by being rented to tenants who will generate rental income for the property or the owner of the property may choose to use the property for their own business purposes.
If the space is being rented or leased the net income of the property after expenses ( Tax, Maintenance, insurance, vacancies, management, etc) should at least service the cost of borrowing ( principal and interest). This ratio called Debt Service Coverage Ratio which varies from lender to lender based on their specific criteria. However, if the owner is operating their own business from the property, the emphasis is on the income that the property owner’s business / corporation generates. So, the financial performance of the business that is operating in the property is critical and needs to be sufficient to cover all the expenses including mortgage cost.
Although these are only a few criteria set out by lender's when it comes to commercial lending, they are the most important by far. Depending on the type of property and the type of business, borrower's will face other conditions which must be satisfied in order to receive a commercial mortgage approval. Some of the conditions are listed below, however, lender's have full discretion to request additional documents at any point during the application process.
We will do our best to discuss as many of these conditions as we can in the future, however for now please see below for some key notes on the subject or feel free to call us today to discuss your options with an expert.
Some other requirements you may need:
- Appraised value of the property
- Loan to Value
- Engineering inspection of the building
- Environmental hazardous assessments
- The borrowers’ Net Worth, credit and income status
