Commercial property loan is different in many ways than getting a loan to purchase residential property. Getting approved for a home loan is a piece of cake for most of the people whereas only a few know how to raise funds through commercial property loans to purchase their own office/workspace.
Commercial property loans can be solely used for business purposes such as purchasing office space, office complexes, hotels, restaurants, etc. The commercial property is further divided into two segments that are
1. Office space
2. The retail outlet.
These two categories are again divided into – under construction and ready to use /occupy.
As these properties are commercial they are mostly overpriced and expensive. The one who is purchasing them are businessmen who want to get the office/workspace for their use and the investors who give these commercial properties to the firms/companies in which they have invested or they also make it available on rent for others.
However, when one wants to purchase the commercial property to establish their own offices, the lender feels positive in terms of providing the loan whereas while approving a loan to an investor they are a bit anxious. Well, this was from the lender’s point of view, now let’s focus from the borrower point of view.
Factors Affecting approval of a Commercial property Loan
- As a borrower, certain things have to be kept in mind while going ahead with the commercial property loan. These include keeping documents ready which includes- documents for address proof, income statement, ID proof, tax returns, etc.
- Another thing which is considered here is the processing fees. For a commercial property loan lenders charge 1% of the loan amount as the processing fees. However, availing different offers many reduce your processing fee with some of the lenders. Now comes the most important part of any loan that is the ‘interest rate,’ here the rate of interest charged for a commercial property loan is usually higher as compared to other property loans. There are few other charges included in this loan like loan application charges, survey fees, the overall cost of the loan, annual fees also being involved.
- Another factor that plays an important role is that the lenders emphasize on the builder’s profile and goodwill in the market. When the property is under construction, then the lenders pay even more attention to the builder’s details because it is necessary for the property to be ready on time for the possession. It is easier to get funding for the new commercial property in comparison with the old property. Rather, it becomes very difficult to avail the loan for such a building as there is a high risk involved in the same.
- The tenure for the commercial property loan is quite short in comparison with the housing or residential loan. The maximum tenure for the repayment of the loan for commercial property is 10 years. Also, the loan margin is not too high. Also, various specifications are being given by the lender company and have to be followed appropriately.
- The lenders also follow the specification such as the borrower will be issued a loan only if he has a minimum square feet area to be funded. Also, different companies and different lenders follow different rules, regulations, and policies.
- Another factor that helps you to avail a commercial property loan is “LTV Ratio”, that is popularly known as the Loan to Value ratio. This ratio helps to calculate the value of the loan provided against the value of the property. The borrowers, who are having a lower loan to value ratios are likely to qualify to avail the loan because of the less risk and more stake in the property. For the commercial property loan, 65% to 80% LTV range is allowed.
- Commercial property loans are restricted in terms of repayment of the loan, as several lenders charge prepayment penalties. The borrower is not allowed to make complete payment of the loan before a certain lock-in period for example in some cases, the lock-in period is mentioned as 5 years and hence the borrower cannot repay the loan only after the completion of 5 years. If the borrower chooses to pay the cash in terms of treasury securities instead of cash, then it involves a higher amount of penalties.
The most important part of the commercial property loan is the creditworthiness, collateral, 2 to 3 year’s bank statement and income tax returns of the borrowers. As discussed above, LTV ratio, debt-service coverage ratio are yet another but also important factors that play a vital role in getting approved for a commercial property loan.