COMMERCIAL LOAN OPTIONS AND ASSISTANCE FOR CALIFORNIA
A commercial loan in California is used specifically to purchase a commercial property or to finance a company’s working capital needs to stay in business. A commercial loan has many similarities to a residential loan and other loans, but should be considered a completely different product all together because of the qualifications and terms that need to be followed in order to qualify for a loan in California and you do need the right assistance to make sure you get a great low rate once qualified for a program.
The main difference between a commercial loan and a residential loan is that a commercial loan is written and qualified based on the amount of income the property produces and a residential loan is written and qualified based on the personal income of the borrowers and credit worthiness.
Commercial loans do take the borrowers personal income information and strength into consideration, but the loan amount is calculated based on the amount of income the property will produce. Lenders use many different ratios and criteria to underwrite each loan, but in most cases, the amount of income the property will produce will determine how much money a commercial lender is willing to lend a potential borrower for a commercial property.
The higher the risk the lender sees the loan to be, the more they will charge to fund the money with interest. The first and most commonly used information is a borrower’s personal FICO score. Borrowers with a high FICO score will qualify for the best rates available in that market. The lower your FICO score, the higher you are as a risk and the higher your interest rate will be and this will lead to the more you will be charged to fund your loan. Another factor is a borrower’s personal risk meaning the amount of reserves the borrower has available to them and their overall financial strength to back the commercial loan. These reserves can include but are not limited to cash, bonds, stocks, 401K, IRA’s and other credit lines. The more reserves a borrower has available, the less risk of the borrower defaulting on a loan and the lender views this as a low risk borrower and gives a much lower interest rate.
The next thing a lender is going to consider will be the property type they are going to lend on. Usually a lender will pick the property types from the most desirable down to the least desirable. Office and retail buildings usually rank in the higher tiers while buildings that could require special use or may cause environmental problems are placed lower due to higher risk possibilities.
The final and most important assessment for a commercial loan will be based on the income produced from the property, which is the final factor of what amount the bank will typically lend on a particular property. There are a number of different factors used to calculate this final figure, but the most important and commonly used is Debt Service Coverage Ratio. The figure calculated from the DCR ratio will tell the lender how much income you expect to receive after you have satisfied your debt service requirements.
The higher the DCR ratio, the more attractive your loan will be. Commercial lenders like to see a DCR of at least 1.0, as anything less would be a negative cash flow, but many require a minimum DCR of 1.2. This is based on the property type and the other factors included to determine the overall risk of the commercial loan.
We can Assist you with all of your commercial loan needs and would be glad to help you qualify for your next commercial loan in California. CALL US TODAY!
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