Already on ArticleSlash?

Forgot your password? Sign Up

Commercial Real Estate Mortgages Basics to Getting Your Loan!

James Hussher

Visitors: 298

There is quite a difference in the process of obtaining a commercial real estate mortgage versus obtaining a loan to buy or refinance residential property. In this article we will examine some of those differences and basic qualifying criteria.

Lending guidelines have tightened recently because of the sharp upswing in defaults and foreclosures. Residential mortgages, though, are still easier to qualify for, because it is felt by most lenders that a homeowner will struggle hardest to retain their residence. That is why “owner-occupied" homes get a lower interest rate than second or investment homes. If times get tough, an owner might walk away from a vacation cabin or investment property, but would probably persevere to the last degree to keep the home they live in.

Similarly, someone is more likely to let go a commercial property than their own home. Additionally, most businesses are incorporated. A corporation is a legal “person" separate and distinct from its owners/shareholders. It has its own credit rating and shareholders, except in the case of brand-new corporations, are not usually on the hook for the liabilities of the corporation. If the corporation defaults on a loan, the lenders can only attach assets of the corporation itself, not the assets of the owners.

For this reason, increased risk, commercial real estate mortgages are made at higher interest rates than residential loans. They also require more paperwork.

For purposes of this article, we will examine the typical loan process for a small business corporation, not a Fortune 500 company. Let us use the following scenario:

James and Grayce own a store that sells newspapers, magazines, cigarettes and lottery tickets. The store is located on the ground floor of a three story building in a commercially-zoned part of Main Street. They live upstairs on the second floor. The third floor is divided into several offices they rent out to an attorney and some other small businesses. They have owned this building and their own business for 5 years. They have made good money and feel they are now in a stronger credit position and would like to refinance the building and lower their monthly mortgage payments.

This type of structure is termed “multi-use" because there are both commercial and residential portions in one building.

Their bank asks for the following documents from James and Grayce:

  • Past 2 years personal income tax returns including 1099 or W-2 forms, depending upon how they pay themselves
  • Copy of all business licenses and permits
  • Past 2 years corporate tax returns and audited financial statements prepared by their CPA
  • Copies of leases for the third floor commercial tenants
  • Past 6 months personal and business bank statements, all accounts
  • List of all other real estate they own including value, mortgage balances, etc.
  • Copy of previous year's property tax bill and copy of property insurance policy and invoice
  • Appraisal - a commercial appraisal can cost $1500 or more, compared to $300 or so for a residential appraisal

The bank is going to analyze these documents to see the following:
  1. Have James and Grayce made their personal as well as business debt service payments on time?
  2. How much is the building worth and how much do they owe? This is called Loan-to-Value Ratio (LTV)
  3. What is their income versus how much they pay out for debt service? This is called Debt-to-Income Ratio (DTI)
  4. How much rent do they collect? 75% of this amount will be able to be considered as “income" and 25% is disregarded to allow for vacancy, repairs, etc.
  5. Their net worth: Assets-Liabilities=Capital

James and Grayce are fortunate to have been in business five years so they can provide good, solid documentation of their income from the business. They have paid all debts on time. The tenants on the third floor have been there for years and always pay on time. The building has appreciated quite a bit since they first purchased it so their LTV is low. They will most likely be approved for their refinance.

One word of caution concerning financial statements for self-employed persons: it is understandable and normal that your CPA will endeavor in every legal way to reduce your tax bill by minimizing your net income. This done by making sure to document all business expenses and deductions, among other methods. The tax return prepared will give you the lowest possible tax bill. But when it comes time to use those same tax returns to prove your income to a lender, you may feel frustrated because your “real" income is much higher than what is reflected on those returns. Well, “you can't have your cake and eat it, too. " However, many lenders will look at other income documentation such as bank deposits to verify what you “really" earned. If you did not deposit a lot of cash you not only probably broke the law but you are now going to be unable to prove your “real" income to prospective lenders. So bear this scenario in mind if you are self-employed and own or wish to own commercial property or even for purposes of purchasing and refinancing residential property. The tax savings from “creative" tax strategies may be eaten up down the road by your being forced to accept higher interest rates on loans. Just something to ponder. . .

As always, you may wish to consult with a Mortgage Planner and a CPA before any purchase or refinancing of commercial or residential real estate.

James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at which James also runs!


Article Source:

Rate this Article: 
The Bailout, Real Estate, Mortgages, Economy and the Stock Market - Oh Boy!
Rated 4 / 5
based on 5 votes

Related Articles:

An Introduction to Commercial Real Estate Financing Basics

by: Troy Harold (September 17, 2008) 

Commercial Real Estate Loan Prepayment Penalties

by: Gary Crum (January 01, 2008) 
(Real Estate/Commercial Property)

Real Estate REIT - Investing In Commercial Real Estate Is Easy With A Real ..

by: Dan Snyder (May 28, 2007) 

Commercial Real Estate Loans: Purchase Commercial Real Estate

by: Tim Kelly (February 04, 2007) 
(Real Estate)

Letting a Real Estate Agent Help You With Your Florida Commercial Real Estate ..

by: Vanessa A. Doctor (July 12, 2008) 
(Real Estate/Commercial Property)

Florida Commercial Real Estate The Advantages of Leasing a Commercial Space

by: Vanessa A. Doctor (June 15, 2008) 
(Real Estate/Commercial Property)

Why One Should Engage Commercial Real Estate Lawyer in Estate Deals

by: Alejandro Padua (July 16, 2012) 
(Legal/Regulatory Compliance)

Real Estate Financing - Mortgages - Secrets Of The Trade

by: Helen Hecker (July 09, 2007) 
(Arts and Entertainment)

Real Estate Financing - What You Need To Know About Home Mortgages Before You ..

by: Helen Hecker (July 11, 2007) 
(Finance/Mortgage Refinance)

The Bailout, Real Estate, Mortgages, Economy and the Stock Market - Oh Boy!

by: Michael Haltman (September 22, 2008)