A commercial mortgage is a type of loan used when purchasing commercial real estate. The property is put up as collateral in exchange for the financing. There are many types of properties that can be purchased using a commercial mortgage, such as retail locations, offices, hotels, apartment buildings. Even certain residential properties can be bought using a commercial loan if they are purchased for a property investment. Residential real estate bought with business intentions can also be split into several different categories, all impacting the type of financing you can secure. There are three main residential property types: pure residential with 1-4 units, pure residential with 5+ units and residential commercial mix. If you are thinking of applying for a commercial mortgage, it is important that you know what type of property you will be purchasing because it will impact the financing you will be eligible for.
Qualifying for a commercial mortgage requires steps that may be very different from the residential mortgage process. It is important to remember that although you can purchase a residential property for an investment, it must actually be used commercially. You cannot build a personal residence on land secured using a commercial mortgage in the same way you cannot operate a business out of a purely residential property. Since many commercial mortgages are purchased by businesses, lenders often require a rundown of how stable and profitable the business actually is. Be prepared to have your lender ask for a clear business plan, growth projections and financial statements before agreeing to grant you financing. It is also safe to say that business owners with good credit will be more likely to secure a larger commercial mortgage.
Lenders also often consider two ratios when qualifying a borrower: the debt service coverage ratio and the loan-to-value ratio. A debt service coverage ratio takes into account the amount of cash a borrower has available to pay the required loan payment. A loan-to-value ratio is the value of the mortgage in comparison to the assessed value of the property. Many commercial properties will have a loan-to-value ratio of 55% to 70% which is lower than most residential properties. Finally, the repayment structure offered by commercial loans is also different. A borrower can choose one of two options, an amortizing loan (which has terms) or a balloon payment (which forces the borrower to either pay the remaining balance, refinance or sell at an agreed upon date).
Although commercial mortgages are often thought to be more tedious and stressful to qualify for, they are achievable for many business owners. Even if you are not the ideal candidate for big banks or other traditional lenders, private lenders will also give you the chance to apply. At Clover Mortgage, we make it our goal to help business owners from all types of financial backgrounds expand and grow their business. While major Canadian lenders offer limited financing options, we work with a variety of lenders to ensure we can get you the best rates available! Contact us today to get your application started and let one of our trusted mortgage agents guide you in the right direction!