What are the different types of commercial real estate financing?
Now that you have a better idea of the type of rates you can secure on a commercial real estate loan these days, the next step is to learn more about the different types of commercial mortgages that are available. In truth, there are many options available to you. We've laid them out for you below.
- Conventional loan: Just like with a residential mortgage, it's possible to get a commercial mortgage loan from a bank or credit union. However, these loans typically require a personal guarantee.
- SBA 504 loan: This SBA loan is backed by the Small Business Administration and is used to finance owner-occupied commercial real estate or necessary machinery. Notably, they accept loan-to-value ratios up to 90% and can be used to construct a new property or to buy an existing one.
- SBA 7(a) loan: This SBA loan can also be used to buy owner-occupied real estate and machinery. However, in addition, it also can be used to cover inventory and working capital costs. In this case, the acceptable LTV only goes up to 80%.
- USDA loan: Backed by the U.S. Department of Agriculture (USDA), these loans can be used to finance the purchase of real estate, machinery, and working capital. However, the property needs to be located in a rural area with a population of 50,000 or less.
- Construction loan: As the name suggests, a construction loan is meant to finance the construction of a new property or the rehabilitation of an existing one. Typically, the loan term is shorter on these mortgages and the loan becomes due once construction is complete.
- Bridge loan: Bridge loans typically come with a higher interest rate and a shorter loan term (6-36 months). They're meant to help you finance the purchase or rehabilitation of an investment property until you've built up your financial history enough that you can qualify for a more affordable product.
- Mezzanine loan: A mezzanine loan, also called "mezz debt," is a second-position loan that is used when a borrower is unable to secure a loan-to-value ratio that's high enough to finance a specific property.
- Hard money loan: Similar to a bridge loan, a hard money loan is an alternative financing option that's used when a borrower is unable to qualify for a conventional loan. These loans also typically come with a higher interest rate.
- CMBS loan: A CMBS loan, or conduit loan, is securitized by pooling loans together and offering bonds that are collateralized by the underlying real estate.
What factors go into determining commercial mortgage rates?
Similar to a residential mortgage, the interest rate you're given will not only depend on the type of loan you select, it will also be determined by your financial profile. With that in mind, we've taken a look at a few of the different factors that go into determining your interest rate on a commercial loan.
- Your loan-to-value ratio (LTV): In lending, your loan-to-value ratio measures the amount of money you've borrowed in comparison to the value of the property. Commercial mortgage LTVs are typically lower than residential loans.
- Your debt service coverage ratio (DSCR): Your debt service coverage ratio is a measure of the amount of cash flow that you have available to pay your debt obligations.
- Your business credit score: If you have a business credit card, your business credit score will be reviewed as part of your overall financial package.
- Your personal finances: Since most commercial mortgage loans require a personal guarantee, your personal finances will also be reviewed as part of the lender's decision-making process.
How are commercial loan rates different from residential loan rates?
There are a few differences between commercial and residential loans. Typically, interest rates are lower on residential loans and the loan term matches the amortization schedule, which means the loan is paid off in full at the end of the term. Commercial mortgage rates, on the other hand, are usually higher and these loans typically have shorter loan terms, which can result in a borrower needing to refinance or make a balloon payment at the end of the loan term.
The bottom line
Understanding commercial loan rates can be tough. These rates are often highly variable and there are a lot of different factors that go into determining the specific rate you'll be given. To that end, use this post as your guide to commercial mortgage rates. Read it over to have a better grasp on what commercial mortgage rate you can expect next time you're ready to apply for a loan.