Pitfalls of commercial loans

6 Replies

Can you guys please share about commercial loans?

So my understanding its more complicated than residential loans..

1) Debt to service ratio should be more than 1.2...What does it mean?

2) every 5 years interest rate changes?

3) Plus you have to put 25% down...Is there any way around it?

Double check me please if my understanding is correct...

1 - DSCR just shows the lender the property can sustain itself and the rents cover the debt

2 - Terms vary but will typically be 5-10 year ARM on commercial loans

3 - 20-30% down is standard depending on the deal (SFH vs MFR) etc.

@Mary Jay Everyone else answered your questions reallt and everything else you said is pretty standard from what I’ve seen. 5-10 year fixed term, then it varies, 20-25 year amortization and sometimes a balloon payment

@Mary Jay

The others answered your questions, but I will add, it really depends on the property and what you vs. Dodd Frank define as "commercial".  Some folks look at commercial buildings as 5+ unit apartment buildings or a warehouse or something like that while some lenders and Dodd Frank legislation look at a simple, single family residential that's non-owner occupied as a commercial dwelling because it generates income.  Lots of different ways to look at the loans and structure is incredibly important.

There are a variety of commercial lenders and just as wide a variety of loan programs. Some offer 30 year fixed and some only offer ARM's. Some have limited title seasoning and others require 2 years and still others have limited seasoning on cash to close while others inexplicably follow Agency guidelines.

A good mortgage broker will be able to guide you through the morass and structure your loan accordingly.

Best of luck

Stephanie

For my clients that buy properties through me I recommend usually 10 years fixed even if rate is slightly higher than 5 for stabilized properties. I like the flexibility to where a typical cycle top to bottom is about 10 years so my clients can pick and choose when they want to sell or refi versus a 5 year might not be the right time to refi or sell.

I am also NOT a fan of the 5+5 five year loans from banks UNLESS they will give a ceiling for years 6 to 10. In other words if rate is fixed at 5.2 today with 25 amort. for 5 years then in years 6 to 10 when that time comes the ceiling was for example 6.50 rate. That way I can stress test the property for worst case and see what it looks like. if I am just open to whatever rate is at that time it could be 7 or 8% rate etc. I do not like unknowns.

Now in five years you should have rental increases and loan balance pay down so even at a higher interest rate the payment might not rise as much.

Remember lenders like to give just enough enticing terms where it suits THEM. You have to find a lender who is willing to get aggressive where the BUYER is getting more of what they want. Crap loans are offered by tons of lenders out there and all the same. I look for the good stuff when I want to buy.