commercial property loans

Commercial Real Estate Loans 101: Everything You Need to Know

You’re driving home from work one day and you see it!

A FOR SALE sign is posted in front of that busy strip mall. You know the one with popular retails stores and a parking lot full of cars. You notice the phrase Short Sale dangling from the bottom of the for sale sign.

Have you finally found that gem of an investment opportunity? When the average return on investment for commercial real estate is 9.5 percent, it’s certainly worth finding out!

If you think this might be your gem, you’ll need to learn about commercial property loans. Keep reading to get some commercial real estate lending basics.

What Is a Commercial Real Estate Loan?

A commercial real estate loan is a mortgage on a commercial property. A commercial property loan can be used for acquisition, development or construction.

Commercial property is income-producing real estate that is used solely for business purposes, such as:

  • Office buildings
  • Strip malls
  • Warehouses
  • Industrial plants
  • Malls
  • Medical centers
  • Hotels
  • Farmland
  • Apartment buildings
  • Garages

Unless you have the cash to pay the full purchase price of a commercial property, you’ll need to secure financing. How hard could that be? After all, you have a residential mortgage. Isn’t it fair to assume a commercial mortgage wouldn’t be much different?

This assumption would be a rookie mistake for first-time commercial real estate investors! Both types of mortgages are collateralized with real estate, but the similarities end there. Let’s take a look at the differences.

If you’re looking for commercial real estate opportunities in orange county, click here

How Are Commercial Property Loans Different from Residential Property Loans?

The best way to understand the differences between commercial mortgages and residential mortgages is to put yourself in the shoes of the lender. In short, commercial mortgages are perceived as riskier investments than residential mortgages. Here are a few reasons for the perception of higher risk:

Your priorities. If you’re in the position to be purchasing commercial property, you most likely own your own home. When a lender reviews all of the debt obligations of a borrower, they think about which obligations a borrower prioritizes if their ability to pay all their bills were to become limited. Lenders know that a borrower will prioritize payment of their residential mortgage over their commercial property mortgage.

Secondary market option. When you signed your residential mortgage loan agreement, you probably agreed to allow your mortgage to be sold in the secondary market. Fannie Mae, Freddie Mac or the Federal Housing Authority (FHA) can buy your mortgage from your lender. When this happens, your lender is no longer carrying the risk that you won’t pay the loan.

On the other hand, commercial property loans are rarely sold in the secondary market, so lenders keep these mortgages on their books. In other words, your lender maintains the risk that you will not pay back to loan. The lender will only grant commercial real estate loans to borrowers that they are confident will pay off the mortgage as agreed.

Source of repayment. When you applied for your home loan, you were asked to show proof of income. Based on that proof, the lender knew how you were going to pay the mortgage payment. It’s a little more complicated for a commercial real estate loan.

The source of repayment for a commercial real estate loan is often from tenant leases. For example, if you purchase a strip mall, you may have 6 tenants with leases that expire at different times. This is a risk to the property’s cash flow, the source of repayment to the lender.

Rate and term. Commercial property loans are their higher interest rates and much shorter repayment schedules. This higher rates and shorter terms are directly related to the lender’s risk assessment.

Do You Qualify for Commercial Real Estate Loans?

As you may have guessed based on our discussion above, it’s more difficult to qualify for commercial property loans than residential real estate loans. It’s a rigorous application and due diligence process.

Lenders have different criteria to determine who is a qualified borrower. In addition, lenders adapt their lending criteria based on market conditions. But all lenders will evaluate you based on some combination of the following five factors.

Character. A minimum credit score of 680 showing a track record of repaying debts as agreed, including a credit history without tax liens, foreclosures or recent bankruptcies.

Capacity. A positive net operating income on the property and at least a 1.25x debt service coverage ratio.

Capital. Equity injection of 20 to 35 percent of the property’s purchase price.

Collateral. Different types of real estate have different levels of risk for lenders. This impacts the assigned loan-to-value which can be anywhere between 50 and 90 percent.

A single purpose property, like a church, has a lower loan-to-value than a flexible purpose property, like an office building. If the collateral is owner-occupied, this will increase the loan-to-value.

Conditions. Choosing a commercial property in the right place and at the right time are important considerations. Lenders know you can’t necessarily control the economy or industry but you can research and be prepared to address any weaknesses in market conditions.

How Do You Apply for Commercial Real Estate Financing?

You understand by now that lenders have high expectations of commercial property loan applicants. Read below for a few tips on preparing for a smooth application process.

Research lenders. There are thousands of commercial real estate lenders. Some lenders focus on small loans, some on large; and some only lend against certain property types. You need to research lenders to identify where you’ll have the strongest possibility of qualifying.

Gather documents. Lenders’ requirements vary. Are you an individual applying for your first commercial real estate loan? Are you an experienced commercial real estate investor? At a minimum, the lender will need to see the following:

  • 3 most recent years personal tax returns and a personal financial statement
  • 3 most recent years of business tax returns and financial statements
  • 3 most recent months of bank statements
  • Property lease(s)
  • Property rent roll (if not 100% owner-occupied)
  • Property Income and expenses
  • Evidence of cash-on-hand for your down payment

If you’re a first-time applicant for a commercial property loan, you should be prepared with a business plan demonstrating your ability to manage commercial property.

Submit application. Consider applying to multiple lenders to increase your chances of approval. If you receive more than one approval, you’ll have some negotiating leverage with your lenders.

Be patient. Loans for commercial real estate take longer to close. Some lenders may promise less than 2 months but expect up to 6 months to close on a commercial property.

Review the loan agreement. Commercial property loans are often structured with a 3- to 5-year term and a 15- to 20-year amortization schedule. This means that you’ll have a large balloon payment at the end of the loan’s term. Do you have a plan in place to make the pay-off?

You Owe It to Yourself

Now that you understand the basics of commercial property loans, find out what type of investment in real estate you want. Maybe you want to learn more about that short sale of the strip mall.

Whatever type of commercial property you decide to buy, this guide has prepared you to put your best foot forward with lenders.

best places to invest in real estate

9 Proven Tips for Securing Investment Property Loans

Investment properties are a hot ticket for people who are looking to make safe investments and get tremendous returns.

Don’t believe us?

More than 5.6 million new homes are going to change hands in 2019. That’s the most new home buys of any year in over a decade.

There are more renters today than at any other point in the last half-century. That means if you’re buying to rent, you have no shortage of competitive tenants to fill your property with.

In today’s market, the problem isn’t how you’re going to make money from your real estate investments, the problem is how you can secure investment property loans so you can purchase those investments.

Therein lies the focus of this article.

No matter if you’re looking at applying for mortgage loans, fix and flip loans, or the like, here are 9 proven tips to raise your odds of getting approved for financing.

1. Save Up a Big Down Payment

The more money you put down on an investment property, the less money you’ll need to ask a lender to loan you. That means that you can vastly improve your odds of securing investment property loans by saving a little bit of money before seeking them out.

You’ll want to have at least 5% to put down on your home or 3.5% if you qualify for an FHA loan. Still, 3.5-5% of a home’s purchase price isn’t an attractive down payment to most lenders.

If you can come up with 20% you can avoid PMI and get funded with confidence.

2. Maintain Awesome Credit

Your credit score is one of the first things investment property loans will look at when deducing your eligibility.

Do you know what your credit score is? If not, you can leverage free services like Mint or Credit Karma to look yours up. You can also request a free credit report from major credit bureaus.

Learn more about requesting your credit report on the Federal Trade Commission website.

3. Take Care of Your Debts

If your income to debt ratio is bad, you’re going to have a lot of trouble getting investment property loans. To aid that ratio, all you have to do is start paying down your existing debt.

Remember, no lender wants to have to compete with other lenders when it comes to who you’re going to pay back first. The fewer people you’re indebted to, the more likely you’ll be able to secure the loan products you’re looking for.

4. Think Outside of the Big Bank Box

When people think about property investment loans, they think about walking into Wells Fargo and Bank of America. While you can certainly get loans from big banks, limiting yourself to them can reduce your chances of getting the loan product you’re looking for.

Check online to find online lenders who may be willing to fund your real estate investment. There are many small and large loan providers who operate strictly online and fund investments every day!

Just be wary of predatory terms and conditions.

5. Ask About Owner Financing

Given that banks have gotten more prudent about when to and when not to award loans, owner financing has become more popular. With owner financing, the person who is selling the home finances it directly to a buyer.

That means sellers get to collect any interest from the loan but they also retain liability if you were to default on payments.

Owner financing agreements are what you and a seller make of them so don’t be afraid to strike up a conversation and see what you can negotiate.

6. See if Credit Cards can Help

When conventional investment property loans fail, some turn to credit cards to help them bridge the gap in their funding needs. Some personal or even business credit cards offer high limits which can give you the extra 30K+ that you need to close a real estate deal.

Credit cards typically carry high-interest rates so be conscious of what you’ll owe on your card and the implications of that debt.

7. Opt for Peer-to-Peer Financing

There are online investment pools available where people like you can pitch real estate opportunities and get multiple investors to pool their resources in order to purchase a property.

Examples of these sites include and

Check out both of those sites to see if either feels like a good fit you and your investment ambitions.

8. Focus on Distressed Sales

Are you having trouble securing the financing you need to purchase a more expensive investment opportunity? If you are, consider looking at foreclosure or pre-foreclosure homes.

These properties are typically open to negotiation as banks are trying to get them off of their books as quickly as possible.

If you find the right distressed property, you could nab it at a low price which means easier financing and more return on your investment.

9. Try a 203K Loan

203K loans make for decent investment property loans for a few reasons. First, they’re backed by the FHA. Second, they include not only the amount of money you need to buy a home, but money to renovate it.

That makes it a favorite amongst fix and flippers.

Note that 203K loans come with a bevy of conditions. Some of those conditions require you to hold your property for a certain amount of time and reside in your property while you own it.

Be sure that conditions fit your investment strategy prior to funding your purchase with a 203K loan.

Tips for Securing Investment Property Loans – Wrap Up

There you have it! 9 proven tips that can help you secure investment property loans.

If you’re interested in leveraging short sale homes to bolster your investment portfolio, look no further than our content on Short Sale Blog to get the insight you need!

From information on identifying investment opportunities to funding your ambitions, our team of experts have the answers to all of your biggest questions!

what does funding mean

What Does Funding Mean in a Real Estate Deal?

5.5 million homes were sold nationwide in 2017, despite the bleak economic forecasts. While the naysayers will say the real estate market is dead, many families are buying homes. This is because they’ve found ways to fund their homes.

As a matter of fact, the projected forecast is set to increase to 6.3 million in 2018.

Whether you’re buying or selling a home, you should be familiar with all of the terms associated with your transaction. If you’re wondering, what does funding mean, then you’ve found your answer.

Keep reading to learn more about the real estate closing process and how and when funds are dispersed.

What Does Funding Mean?

If you’re looking at the real estate market funding, the first thing you should do is educate yourself. Funding is the process of having the mortgage lender release funds to the escrow before closing a real estate transaction.

And since funding occurs a few days prior to the close of the transaction, the interest rate kicks in from the date of funding.

In the US, the funding process differs in every state according to state laws. For any funding to be granted, all the conditions of the lender need to be satisfied. Loan documents must be signed.

Take California for example. Buyers of new homes sign loan documents and the closing take place a few days or even a week later. This is also called a dry closing.

This is unlike other states, particularly the East Coast, where closing occurs the day the loan documents get signed. This is called a wet closing.

An example of the mortgage process is described further. So read on.

What Do You Need to Fund a Loan?

First, the TRID (TILA RESPA Integrated Disclosure) is now required by law. According to the TRID process, before you can sign loan documents, a closing disclosure is sent to the buyer. After the mandatory, three-day waiting period, the buyer is permitted to sign mortgage documents.

This may seem like a lot of paperwork, but TRID was created to simplify mortgage documentation. It was also made to make documents easier to understand, curtail fees for home buyers and prevent unforeseen issues at closings.

If you want your loan to get funded, you must sign all these documents.

Notarization of The Documents

Documents submitted for loan purposes require notarization. So, buyers will have to carry two forms of identification and sign them in the presence of a public notary.

But fear not.

Anticipating the needs of the business, many escrow employees and title company workers are also public notaries themselves. If you’d prefer, you can also get a mobile notary to come over at a location of your choice.

The Input of Underwriters

Once all concerned parties have signed the loan documents and paperwork for the escrow, they send it to the lender for review. This is where underwriters come in. They study the loan documents and assess how much risk the lender is assuming.

They consider the land, the property, and the borrower. Real estate underwriters are different from securities underwriters. These people specialize in real estate, appraise the value of the property and the credit health of the borrower prior to making their report.

Underwriters start work only after the loan conditions get satisfied. In some cases, the documents are also not drawn until the conditions get satisfied, also called “prior to the doc.” However, most of the lenders will ask for loan conditions to be completed before funding.

Varying Loan Conditions

Sometimes, an appraisal review or a receipt of all bank accounts may be requested as part of the loan conditions. There could be a clause about the installment of appliances and in working order prior to closure. You can never really know what loan conditions may be needed.

For example, an FHA loan condition stipulates that the paint chips around the house must be physically picked by a worker.

When the lender reviews the documents executed for the loan, he will get the fund ready. This translates to having the money wired to a title or escrow company. On receiving the wire transaction, the closing agent can record your file.

Sounds easy enough, except closing agents have specific times during the day when they can record a file. Some may have only one time a day, others multiple times per day.

This is important because if the fund wire comes in too late at a place with a single recording time, the transaction doesn’t close until the next day.

Getting your funds is the key to closing the sale of a home. It also adds to your interest. You can try to expedite the process of closing by asking when the loan funds will arrive and if same day closing is possible.

Caution About Fees

Various fees and charges get levied during the mortgage process. Closing costs will include these fees. These are fees for doing a title check, appraising your property, processing your loan, and any other service offered.

On the day of closing, you will have to bring in a check covering all those closing costs.

If you want to know what your estimate will be, multiply your loan amount by 3%. If you’re buying a home in a very expensive zip code, multiply that by 5%.

After applying for your mortgage loan, you will get a rough estimate of closing costs. But don’t get shocked if it ends up being much higher than the initial estimate.

If your lender estimates a 10,000$ closing cost, then you should be ready with a check for 11,000$. Talk to your lender, and find out what you need, whether that’s cash reserves or other financial details. He can help you understand the details of the funding applicable to you.


While TRID and the entire funding process seems simple enough, a mortgage professional can help you navigate through all the procedures and paperwork.

So what does funding mean for you as a buyer or seller? If you still don’t have an answer or still have doubts about funding, loans, and refinancing, you can find more information here.

Basic Loan Structures For Real Estate Investments

For the average person considering buying their first home the realization of all the different decisions that need to be made can be overwhelming. One quickly recognizes that buying a home involves much more than finding the right place. In addition to shopping for the right home you also need to shop for the right financing and the right expert advisors as well.

The good news is that if you take enough time to research the different aspects of each phase you will not only save your money but you can even save your time and energy as well. Once you have determined the right short sale market where you invest in it is time to start your search for the right kind of financing.

There are many different types of loans that a potential homeowner can secure that can vary based on many different factors.

The Traditional Loan

These are fixed-rate mortgages that are extremely difficult to qualify for. The requirements for these types of loans are often very stringent and depend a great deal on a variety of factors including your credit score, income level, amount of down payment you have to offer and other expectations.

Fixed rate mortgages are not insured or guaranteed by the federal government and will usually require you to obtain your own mortgage insurance policy for protection. The advantages of this type of loan is the lower than usual interest rates and the fact that the interest will not fluctuate but will remain fixed throughout the lifetime of the loan. This provides the buyer with that added sense of security that can give them peace of mind.

FHA Loans

FHA (Federal Housing Administration) loans provide a variety of different loan programs for real estate investing. They usually require a much lower down payment than the traditional loan but are much easier to obtain. These types of loans are the preferred choice for first time buyers since their credit requirements have a simpler process they must meet than other financing options.

VA Loans

The US Veterans Affairs office guarantees loans for veterans. It is important to understand however that the VA does not actually issue loans itself but merely serves as a guarantor to many qualified borrowers allowing them to get into the home of their choice. With the VA backing your loan application it can make it that much easier for you to find the financing option that could get you into the home of your choice.

There are many other financing options to choose from for the new homeowner so it would be well-advised to carefully shop around for the one that can fit your circumstances best. While anyone may be able to recommend a particular short sale financing option it is important to understand completely that the choice you make should be based on your own personal circumstances and not on the opinions of others.

Purchasing your first home is one of the most exciting things you can do but when you approach it with an effective strategy you can take the sting out of the stress of shopping for your first home.