Types of Commercial Real Estate Loans
What You Need To Know About Commercial Loans
Earning money from a property does not necessarily qualify the real estate as ‘commercial.’ For example, real estate bridge loans are not set aside for road extension constructions but rather as the physical bridge which can be included in the construction loan. There are many types of commercial property loans, causing a lot of confusion to borrowers. Allow us, the Colorado Mortgage Pros, to walk you through the various types of real estate loans and what to and not to do to qualify.
Types of Commercial Real Estate Loans
- Long-Term Commercial Mortgage with Fixed-Interest
The conventional commercial real estate loan from a bank or lender works the same way as the home mortgage. However, it usually has shorter terms that have broad uses. The real estate loan normally offers a repayment period that does not exceed twenty years with most falling between 5-10 years. This loan requires one year in business, at least 51% occupancy of the property, and a personal FICO credit rating of 700 and above. The interest rate normally falls between 4.75-6.75% and has a variable option. This implies the interest rate can move up or down depending on the trends in the real estate markets. This type of fixed-rate real estate mortgage loan means the interest rates and payment schedule remain stable.
- Refinance Loan
Just like with the home mortgage, property owners will also take advantage of commercial real estate loans that have reduced interest rates. In most cases, there are further fees and costs involved while refinancing the loan, but they are minimal compared to the savings through a low monthly payment. Therefore, refinancing can be used to raise a company’s profit flow either through the improvement of the property or expansion of the business.
- The Interest-Only Payment Loan
Also known as balloon loans, the interest-only payment loans are used by companies that expect huge payouts at future days. These payment schedules are usually made utilizing smaller interest amounts with the bigger balloon payment scheduled at the end of the agreed-upon term, which is typically between 3-7 years. Most companies opt for this loan when building a commercial property as it is beneficial for refinancing as an end-term lump sum.
- Hard Money Loans
Most financing types normally originate from banks, but you can acquire a hard money loan from private property. In this loan type, the investors or rather lenders do not focus on the borrower’s credit score but the value of the commercial property and take the necessary lending risks. The interest rates in these loans are very high because the loans are short-term and require fast payment. On top of the upfront fees, the interest rates can be as high as 10-18% over a period of between 6-24 months. House flipping investors are big fans of these loans.
- Bridge Loans
Bridge loans are normally just like the hard money loans only that their interest rates are lower and the terms are longer. The interest rates can be between 6-9% with a period of as long as three years. The borrowers will wait for a period of between 15-45 days for the loan approval before they get their funds. To qualify, borrowers ought to have a minimum credit score of 650 and the funds required for the 10-20% down payment. Bridge loans are commonly used by short-term investors to cover construction work costs and remodeling before refinancing.
- Construction Loans
These are the loans used to cover costs linked to building commercial buildings such as rental units, office buildings, retail shops, and industrial buildings, among others. The funds received will cover the materials and labor costs. An investor who has purchased an undeveloped land for building on, this land can be used as security. Building materials can be used as collateral for the loan. The terms in this loan are between 18-36 months, and after the end, the applicants generally shift into a mortgage that has longer terms.
- Blanket Loans
Blanket mortgage loans are typically used to fund the purchase of more than one property. These loans are especially popular with investors who purchase large land tracts and then subdivide them to develop several parcels that can be gradually sold independently.
- Term Loans
These are one of the most common business mortgage loans. Borrowers borrow a certain amount, which is then paid back over a specific time. The loan terms can vary with some being short and others long term. Payments are made monthly, and borrowers have to meet certain qualifications.
- Business Credit Lines
A business credit line works just like a credit card. The business money can be drawn at will for purposes such as emergencies, medical issues, investment, and purchasing equipment. Borrowers can also access the amount without going through the loan process.
- Government Business Loans
The United States government also offers small business loans through the Small Business Administration, SBA. There are numerous SBA loans with very low interest rates and with the SBA guaranteeing the loan.
Types of Commercial Real Estate
Commercial real estate refers to structures, land, or buildings that generate revenue streams. Buildings, where the owner has an occupancy of above 50%, have a higher chance of qualifying. Properties that qualify as commercial real estate include:
- Apartment buildings
- Office buildings
- Retail structures
- Medical buildings
- Industrial buildings and warehouses
- Resorts and hotels
- Land developments
As seen above, there are many loans for all types of commercial real estate property. To determine the best option for your course, specialists at Colorado Mortgage Pros will provide the best advice.