Although you may be familiar with residential real estate lending, securing a commercial real estate hard money loan involves excellence in key financial areas. Before you start the commercial loan process, take some time to review the five areas that can make a difference between successful qualification and unfortunate rejection.
1. Total Net Worth
You may have heard that it takes money to make money, and in the world of commercial real estate this often the case. When reviewing qualifications for a commercial loan the lender places a heavier emphasis on a net worth that what you see with residential loans. In general, a net worth that is equal to the requested loan amount is recommended.
2. Liquid Assets
Even with a high net worth, if your real estate down payment wipes out your easily accessible cash flow a lender may consider that a liability. Lenders want to know that after the loan closes you will still have quick access to cash in case of an emergency to ensure you don’t miss a payment.
3. Previous Experience
Although residential lenders look at employment history for stability purposes, commercial hard money lenders take it one step further and look for prior management experience or previous experience as an owner. A proven track record as a landlord or previous commercial property owner can increase lender confidence in your ability to handle the rigors of commercial ownership.
4. Income Stream
Many commercial property owners are self-employed, so commercial real estate hard money lenders need to see the big picture of an income stream to provide funding. Commercial lenders are less concerned with debt-to-income ratio than residential lenders. Potential owners that are not self-employed should be prepared to provide W-2 forms for several years and other documentation to show any other income streams
5. Credit History
When it comes to lending, most people think that a good credit score carries the most weight. This may be true with residential lending, but commercial lenders are less concerned with the potential property owner’s personal credit score and more concerned with other areas of qualification like net worth, liquidity, income, and previous ownership experience.
In some ways, the commercial real estate lending process works similarly to obtaining a residential real estate hard money loan. There are key differences that potential commercial property owners need to become familiar with before beginning the loan process to make sure that their overall financial picture shows readiness to take on the project.
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