Business mortgage borrowers often ask us how lenders determine the rates they offer on business mortgage loans. There are many criteria that lenders use when setting rates, but lenders will assess a loan's relative risk 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.
- Borrower Qualifications. Lenders analyze a borrower's or guarantor's assets, liquidity, cash flow, credit history, and real estate experience to determine overall risk. Lenders like to see borrowers with good histories own and manage similar properties. They want to see enough cash reserves to cover unexpected problems that may arise and they expect borrowers to have a good history of paying their bills on time.
- Location and market of real estate. Good quality properties in large metropolitan and suburban areas are considered to be of lower risk than inferior properties and properties in small rural locations. Good properties in good locations are easier to rent out in case tenants leave or situations where the remaining lease terms are short. For example, if a property in a poor location becomes vacant, a significant amount of renovation will be required to attract new tenants.
- Tenant mix. Multi-tenant commercial buildings with high-quality tenants and long-term leases are highly desirable when financing office and retail property. Lenders do not like vacancy, high turnover rates and constantly moving properties. Lenders like to see well-managed properties that attract and retain tenants for the long term
- Stabilized occupancy. Lenders look for properties that have had a high occupancy rate over the past 2 to 3 years with minimal disruption. Properties with vacancy and fluctuating rental history are considered a higher risk. Lenders will ask for operating statements from the past 2-3 years. They expect stable occupancy and rising net income. Homes that fluctuate enormously with income and expenditure will raise many questions.
- State of ownership. Property in good condition with little overdue maintenance is considered a lower risk than property in need of major capital improvements. Properties in poor condition usually require the lender to set aside or deposit funds for repairs and maintenance. Homes in poor condition generally perform worse than well-maintained homes.
- Lever. Loan-to-Value is very important in determining risk. A 50% LTV (loan to value) loan will be better priced than an 80% LTV loan. If a home is experiencing difficulties, 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 excess cash flow a property generates, the lower the risk. Excess cash flow can be used to reduce sales, repairs, or other cash drains.
Ultimately, lenders don't want to expose their lending institutions to unnecessary risk. A borrower must be willing to address all these issues in the application to the satisfaction of the lender to increase the chances of getting a loan approved at the lowest rate possible.
Once you qualify for a commercial mortgage loan, it's helpful to get an idea of your proposed monthly payment in advance. A commercial mortgage calculator is a very useful and handy tool. Whether you're purchasing a new commercial building or refinancing an existing commercial loan, it's helpful to know how much of a loan you can afford at current rates. A commercial mortgage calculator calculates your monthly payment for you. You will be prompted to enter the loan amount, number of years and interest. The mortgage calculator calculates your monthly amount.
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