Getting commercial real estate loans approved is almost always complex and frequently difficult. Business borrowers need to realize that there are several commercial mortgage loan situations which can be especially difficult to get approved. Examples of eight difficult business loan situations are described to illustrate two key points: (1) these difficulties are not uncommon; and (2) these difficulties can be overcome in most cases.
Difficult Commercial Mortgage Loan Situation Number 1:
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A commercial loan that needs to be closed in 60 days or less. It is not unusual to discover that a traditional lender considers six to nine months "normal" for commercial loan underwriting. Obviously this will act as a severe constraint if a commercial borrower is trying to buy a property that the seller wants to close in two to three months. If quick funding is essential, the commercial borrower should contact a non-bank business lender where most commercial loans will close in 45 to 55 days.
Difficult Commercial Mortgage Loan Situation Number 2:
A commercial loan that won't work without long-term financing. What is long-term financing for a commercial loan? Some commercial lenders view 3-5 years as the longest period before a commercial loan will be subject to a balloon payment. If that sounds short-term instead of long-term, most non-bank business lenders can arrange 25-year to 40-year commercial real estate loans for commercial properties. Longer-term financing will often be the critical difference that facilitates a successful business investment (especially because mortgage payments will be reduced dramatically).
Difficult Commercial Mortgage Loan Situation Number 3:
Providing financial data to a commercial lender after the loan is closed. Some commercial loans will have covenants stipulating that the lender must receive financial data even after the loan closing and that the loan can be recalled (forcing the borrower to repay early) if the audit of this data is not satisfactory to the lender. In stark contrast to this, commercial loans via non-bank commercial lenders based on Stated Income will not require business plans or income verification either before or after the loan is closed.
Difficult Commercial Mortgage Loan Situation Number 4:
Borrower is self-employed or income is paid on a commission, bonus or incentive basis that is somewhat erratic and difficult to document properly. Non-bank commercial lenders using a Stated Income business loan program will not require tax returns or any income verification. They also will not require commercial borrowers to sign IRS Form 4506 (which authorizes the lender to obtain tax returns directly from the IRS), a form routinely required by many commercial lenders.
Difficult Commercial Mortgage Loan Situation Number 5:
A borrower wants to refinance a commercial property and use $500,000 to $1 million from the proceeds to buy another property. Most commercial lenders will restrict the maximum cash that can be taken out of a refinancing, with a normal limit of $100,000 to $250,000. It is also not uncommon to encounter restrictions on the use of the cash. With a commercial loan via most non-bank commercial lenders, the commercial borrower could receive unrestricted cash up to one million dollars and use the proceeds without restrictions.
Difficult Commercial Mortgage Loan Situation Number 6:
A borrower wants to use a substantial amount of subordinated debt (a seller second or other secondary financing) to reduce the amount of cash needed to purchase a commercial property. Many commercial loans will not permit a seller second or other forms of subordinated debt. With a commercial loan via most non-bank business lenders, a commercial borrower can obtain Combined-Loan-to-Value (CLTV) ratios up to 95% with subordinate financing (including seller seconds).
Difficult Commercial Mortgage Loan Situation Number 7:
Sourcing and Seasoning of assets or ownership. For a purchase, commercial lenders will frequently want documentation about where the down payment is coming from (the source, so having limitations about where the funds are coming from is called sourcing). Commercial lenders will frequently have requirements stipulating that the down payment funds must have been in a specific account for a specific period of time, often 3-6 months or longer (this is called seasoning because it is tantamount to requiring that the funds have matured by being in the same place for a while). Seasoning of ownership is similar to seasoning of funds, except this requirement involves the minimum time someone has owned a commercial property before they can refinance the property. Most non-bank commercial lenders do not have any requirements or limitations involving either sourcing/seasoning of funds or seasoning of ownership.
Difficult Commercial Mortgage Loan Situation Number 8:
A borrower needs a $100,000 commercial loan. What's difficult about this situation? Many/most commercial lenders will have much higher minimum amounts for commercial loans ($250,000 to $350,000 is not uncommon). At most non-bank business lenders, the minimum commercial loan is $100,000.
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