How to get the best interest rate on your commercial mortgage
Commercial mortgage borrowers often ask us how lenders determine the interest rates they offer on commercial mortgages. There are many criteria that lenders use when setting interest rates, but lenders will assess the relative riskiness of the loan when reviewing a loan application. The lower the risk, the lower the rate. The higher the risk, the higher the rate. It is important to understand which factors are important to lenders and insurers.
– Qualifications of the borrower. Lenders will analyze the borrower’s or guarantor’s net worth, liquidity, cash flow, credit history and real estate experience when determining overall risk. Lenders like to see borrowers with a good track record owning and managing similar properties. They want to see enough cash reserves to cover unexpected problems that may arise, and they expect to see that borrowers have a good history of paying their bills on time.
– Property location and market. Good quality properties in large urban and suburban areas are considered lower risk than lower quality properties and properties in small rural areas. Good properties in good locations are easier to rent in case tenants move out or in situations where the remaining lease terms are short. For example, if a property in a bad location becomes vacant, significant renovations will be needed to attract new tenants.
– Tenant mix. Multi-tenant properties with quality tenants and long-term leases are highly desirable in office and commercial financing. Lenders don’t like vacancies, high turnover rates and properties in a constant state of flux. Lenders like to see well-managed properties that attract and retain long-term tenants
– Stabilized employment. Lenders look for properties that have enjoyed high levels of occupancy with minimal interruptions over the past 2 to 3 years. Properties with vacancies and variable rents are considered riskier. Lenders will ask for operating statements for the last 2-3 years. They expect to see steady employment and rising net income. Properties that fluctuate wildly with income and expenses will raise many questions.
– Condition of the property. Properties in good condition with little deferred maintenance are considered lower risk than properties in need of major capital improvements. Properties in poor condition usually require the lender to set aside or escrow funds for repairs and maintenance. Properties in poor condition tend to perform worse than well-maintained properties.
– Leverage. The loan-to-value ratio is very important in determining risk. A 50% LTV (loan to value) loan will be priced better than an 80% LTV loan. If a property is struggling, there is much more room for error with low-leverage loans.
– Debt coverage. This refers to the excess of net operating income over annual mortgage payments. The more cash flow a property produces, the lower the risk. Excess cash flow can be used to mitigate against turnover, repairs or other cash drains.
After all, lenders don’t want to expose their lending institutions to undue risk. The borrower must be willing to deal with all of these issues to satisfy the lender when applying to increase their chances of getting approved for a loan at the lowest possible rate.
Once you’ve qualified for a commercial mortgage loan, it’s helpful to get an idea of your proposed monthly payment in advance. The commercial mortgage calculator is a very helpful and useful tool. Whether you’re buying a new commercial building or refinancing an existing commercial loan, it’s helpful to know how much of the loan you can afford at today’s interest rates. A commercial mortgage calculator will calculate your monthly payment for you. You will be asked to enter the loan amount, the number of years and the interest rate. The mortgage calculator will calculate your monthly payment.
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