Commercial mortgages: everything you need to know

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How do commercial mortgages work?

Unlike residential real estate, commercial real estate is defined as property that produces income and is used solely for business purposes. The most common examples of commercial real estate include malls, shopping malls, office complexes and buildings, and hotels. The acquisition, development and construction of these properties are financed by mortgages or commercial real estate loans, that is, mortgages secured by liens on the commercial property.

Banks and independent lenders are actively involved in lending on commercial real estate, much the same way real estate mortgages work. In addition, pension funds, insurance companies, private investors, and other sources, such as the United States Small Business Administration’s 504 loan program, provide funds for commercial real estate.

How do you qualify for a commercial mortgage?

To qualify for a commercial mortgage, lenders will generally need your business to occupy 51% of the property. The amount of the loan and the rate you will receive depends largely on your credit and the value of the property you are putting up as collateral. The reason for this is that most commercial mortgages are asset-based loans. Here are different ways to qualify for a commercial mortgage:

Choose the right location. Property value impacts the mortgage decision, which means getting financing for prime retail space in San Francisco is likely to be easier than financing a storage unit rural area outside of Keystone, South Dakota. When deciding where to buy or build, you’ll want to take location into consideration.

Communicate renovation plans to lenders. Your lender will always want to know if you are planning to make any improvements to a property. Your lender will also need to look at the After Repair Value, or ARV, for any large-scale home renovations you do. Make sure you have a plan for how you will use the mortgage before you apply. That way, if the lender has questions, you’ll have the answers.

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