7 Key Factors to Consider When Shopping for a Commercial Real Estate Loan

Commercial real estate loans enable you to purchase, rehabilitate, construct, or refinance commercial properties, such as offices, industrial facilities, retail centers, and more. When it comes to finding the most suitable financing option for your commercial real estate investments, shopping around cannot be overstated.

Alongside helping you save money, shopping for a commercial real estate loan is key to finding lenders whose loan terms are tailored to your needs. Discussed below are the seven key factors to consider when shopping for a commercial real estate loan.

Types of commercial real estate loans

Different commercial real estate loans have varying terms and rates. Understanding the various commercial real estate financing options is crucial to helping you find the best for your needs and condition. They include:

• Traditional commercial real estate loans: These loans are provided by credit unions, banks, and other lenders. Conventional commercial real estate loans aren’t easy to qualify for because they require a good credit score, a low debt-service coverage ratio, and proven business success
• Bridge loans: Commercial bridge loans come in handy for projects that may not qualify for conventional commercial real estate loans, including renovations. These loans are ideal when seeking a fast turnaround between your loan application and securing financing
• Hard money loans: These are short-term lending instruments provided by private lenders, such as Pacific Northwest Capital Partners. Hard money loans operate like bridge loans and are easy to qualify for, and are funded faster

SBA 504 and SBA 7(a) loans are other commercial real estate loans you can leverage when investing in commercial real estate.

Purpose of the commercial real estate loan

Different commercial real estate loans serve different purposes. Knowing why you need these loans can help you find the most appropriate financing option. You may need a commercial real estate loan to:

• Purchase a property: You can use a commercial mortgage to buy a commercial property with the aim of providing a physical space for your business or generating income via renting or leasing
• Expand or renovate: A commercial real estate loan can help you renovate or expand an existing commercial property to enhance its worth, accommodate business growth, or boost functionality
• For property development: You can use commercial mortgages to finance the development of new commercial projects from scratch to completion, including land acquisition, building expenses, and initial operating costs
• Refinance: You can also take a commercial real estate loan to refinance an existing commercial mortgage loan to prolong the loan term, leverage lower interest rates, or lower monthly payments

Interest rates and amortization period

Interest rates play a significant part in loan costs. A fixed-rate commercial real estate loan provides stable mortgage payments over time. Variable-rate mortgages might start lower but may change. Since interest rates differ among lenders, shopping around can help you secure the best deal. An amortization period determines how long it will take to repay the commercial mortgage.

Extended periods translate to small monthly payments. However, you’ll pay more interest overall. Shorter timelines come with higher payments, but the total interest is lower. When shopping for a commercial mortgage loan, opt for the one whose amortization period will allow you to pay without defaulting.

Your credit score

Your credit score is a major consideration that lenders look at when assessing your commercial real estate loan application. An excellent credit score shows that you’ve been managing your money responsibly and aren’t likely to default. 

Conversely, a low credit score not only makes it harder to get approved for a commercial mortgage but also results in higher interest rates. Improving your credit score before applying for a commercial real estate loan can help get your loan approved quickly and secure low interest rates.

If your credit score isn’t favorable, you can access commercial real estate loans with bad credit. However, the eligibility criteria for these loans can differ substantially among lenders based on your income, credit history, and the worth of the property you’re seeking to finance. For a bad credit rating, you may have to provide a higher down payment or extra collateral to reduce your loan-to-value ratio, which lowers the lender’s risk.

Down payment

Unlike residential loans, commercial real estate loans are usually more expensive. Many of these loans need a down payment, which may be as high as 35%. A down payment comes with numerous benefits, including the following:

• Lowering interest rates: Paying a larger down payment allows you to secure better loan terms and lower interest rates because the lender isn’t taking as much risk and is ready to provide more favorable financing
• Demonstrating your commitment as a borrower: A down payment shows your financial commitment and share in the property, which encourages you to manage your real estate investment more effectively to prevent default
• Providing immediate equity: A down payment offers immediate equity in the property you’re investing in. You can access this equity in the future if needed, and it can help you qualify for more financing when needed

Fees and other associated costs

Commercial real estate loans come with some fees and other associated costs, including prepayment penalties, origination fees, and more. Origination fees are the money you pay to process a new loan. A prepayment penalty may apply if you pay off your commercial mortgage early. 

These charges safeguard lenders from lost interest income and might disappear after a predetermined period or reduce over time. Asking about these fees and expenses beforehand not only avoids surprises down the road but also helps you find the most suitable commercial real estate loan.

Lender’s reputation

Lender reputation is a major consideration when shopping for commercial real estate loans as it directly influences the fees, interest rates, and your overall borrowing experience. Lender reputation is vital for various reasons, including the following:

• Competitive interest rates and loan terms: A reputable lender usually has a history of providing competitive loan terms and interest rates, translating into substantial savings for you as a borrower
• Seamless, efficient lending process: Reputable lenders have streamlined, efficient lending processes, which reduce complexities and delays
• Trust and transparency: Reputable lenders are highly likely to be clear about their terms, fees, plus the lending process, creating a sense of confidence and trust for borrowers

Looking for feedback from previous borrowers can help you find the most suitable commercial real estate loan for your needs.

Endnote

Considering the numerous commercial real estate loans and their different purposes, finding the most suitable option for your needs can be challenging. However, looking at key factors like types of commercial real estate loans, interest rates and amortization period, lender reputation, and down payment can help you secure the best commercial real estate loan.