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A commercial mortgage is a loan secured through lenders to purchase or to construct a commercial real estate (as opposed to residential). The difference between commercial and residential mortgage is that the borrower is generally a company or business as supposed to an individual. The business can be a form of a limited company, including incorporated or partnership. Typically, personal guarantee is required and due to a nature of the loan, the approval process is more involved. In addition, rates for commercial mortgages will likely vary depending on the type of the property and the expected revenue which would generate.
Types of properties
There are different types of properties that can be classified as commercial properties. It is important to identify exactly what type of property you are looking to finance. Residential properties can also be categorized under the commercial mortgage if it consists of more than four units.
Several other properties can fall under a commercial mortgage. You would consider a commercial mortgage if you are looking to finance an office, retail, warehousing or industrial property.
Expected time frame
You need to allow the entire process to take somewhere from 60 days up to a year with more involved appraisal, sometimes including the requirement for environmental studies.
It is suggested to explore your options through the service of a mortgage professional since the process and conditions differ greatly.
For commercial mortgages, it can be difficult to compare rates as lending criteria are not typically advertised and terms and conditions can vary significantly. It is advisable to procure the services of a mortgage specialist. A commercial specialist usually deals with office, industrial, retail and rental apartment properties and can generally connect you to several lenders in the required area.
The following are some of the required criteria set by lenders if you choose to pursue a commercial mortgage. Due to higher risk and higher loan amount, more strenuous conditions are set to qualify borrowers.
- Credit History: In most cases, lenders require a personal guarantee from business owner with good credit score as well as creditworthiness of the business.
- Debt service coverage ratio: Expected cash flow and capability to debt service the loan payment is the most important criteria for a commercial mortgage. If you are not meeting the required loan to value ratio, expect to invest some of your own money into the purchase.
- Current business situation: Other important criteria’s lenders may look at is your current business situation. If you’re business has been in operation for a while, lenders require you to provide two-year financial statements and other business-related documents. You may need to provide your business plan and financial projections if you are entering a new venture with a verification of enough liquid assets.
- Type of business: The terms of a commercial mortgage are determined by the type of business as well as the property you are purchasing. It is strongly recommended to seek legal advice while you initiate a negotiation with a lender through a commercial mortgage professional.
- Down payment: Lenders typically assess borrowers’ risk and determines the down payment, ranging between 20 to 35%. However, a pure commercial property requires a higher down payment which is as much as 50%.
Commercial Mortgage Insurance
Although it is not always available to commercial properties, CMHC will issue an insurance for mixed residential – commercial property. Lenders will likely offer somewhat better rates to those property insured by CMHC. However, there are only certain brokerage firms designated to deal with CMHC commercial insurance, TMG being one of them.
Mortgage broker fees
Because of its complexity and lengthy procedure, commercial mortgage professionals will charge you a finder’s fee. Fees can range from 0.5% to 1% depending on the scale of loan, but in exchange you will have access to some of the best commercial mortgages provided by pension funds, credit unions, and other niche lenders.