It's quite a difference in the procedures for obtaining a commercial real estate mortgage against the granting of a loan to buy or refinance residential real estate. In this article we examine some of these differences and the basic selection criteria.
Lending guidelines have been recently reinforced by the strong upturn in defaults and foreclosures. Residential mortgages are easier to qualify for because it is by most lenders, homeowners that a struggle it is felt the hardest tomaintain their residence. Therefore, "owner" homes will receive a lower interest rate as a second or investment property. When times get rough, an owner of the vacation cabin or as investment property to go, but it is likely to remain until the last degree to the website which they live to keep
Similarly, someone is releasing a commercial property rather than their own home. In addition, most companies have taken over. A corporation is separate legal "person" and from hisOwners / shareholders. It has its own credit rating and shareholders, except in the case of brand new companies is usually not on the hook for the debts of the company. If the company standards for a loan, the lender may only attach the assets of the company itself, not the property of the owner.
For this reason, an increased risk in commercial real estate mortgages are at higher rates than residential loans. They also require more paperwork.
ForPurposes of this article, we will examine the typical loan process for a small business enterprise, not a Fortune 500 company. Let the following scenario:
James and Grayce own a business that newspapers, magazines, cigarettes and lots sold. The business is in the ground floor of a three-story building in an economically-zone part of Main Street. They live up on the second floor. The third floor is divided into several offices, they rent to a lawyer andsome other small businesses. They have the building owned his own company for 5 years. You've earned good money, and feel themselves to be in a stronger position and would like to refinance the building loan and lower their monthly payments too.
This type of structure is called a "multi-use" because there are both commercial and residential components under one roof.
Your bank asks for the following documents of James and Grayce:
Past 2 years personalIncome tax returns including 1099 or W-2 forms, depending on how they themselves are charged
Copy of all business licenses and permits
Past 2 years corporate tax returns and audited financial statements prepared by their CPA
Copies of the leases for the third-floor commercial tenants
Last 6 months personal and business bank statements, all accounts
List of all other properties which they possess value, mortgages, etc.
Copy of property tax liability last year andCopy of the policy and property accounting
Appraisal - a commercial evaluation can cost $ 1500 or more, compared with $ 300 or so for a home-rating
The bank is to analyze these documents to see the following:
Did James and Grayce made their personal and business payments on time?
How high the building is worth and how much they owe? This is called a loan-to-value ratio (LTV)
What is their income, compared how much they pay forTo use debt? This is called debt-to-income ratio (DTI)
How much rent they collect? 75% of this amount may be considered as "income" and 25% is not considered to allow for vacancies, repairs, etc.
The net worth: Assets-Liabilities = Capital
James and Grayce are fortunate to have been in business five years, so that they can deliver good, solid documentation of their income from the business. You have to be paid on time all the debts. The tenants on the third floor there was forYear and always on time to pay. The building is pretty much since they first bought their LTV is so despised. You will most likely be approved for refinancing.
One word of caution on financial statements for the self: it is understandable and normal, that your CPA will try in every legal way to reduce your tax bill by minimizing your net income. After this was done by all business expenses and deductions document, among other methods.The tax return is prepared for you the lowest possible tax burden. But when it's time to use the same tax return to prove your income to a lender, you may feel frustrated because your "real" income is much higher than what is reflected on the income. Well, "you can not eat the cake and it too." However, many lenders in other income documents such as bank deposits will be looking to verify what you really "deserves. If you do not deposit much money you not only likelybroken the law, but you will not now be possible, your "real evidence" Income for potential donors. Thus, this scenario bears in mind if you are self-employed and want to own or possess, or commercial property for the purpose of purchasing and refinancing residential property. The tax saving of "creative" tax strategies can be on the way from your forced to accept higher interest rates on loans eaten too. Just something to think about ...
As always, you may want to consult with a mortgagePlanners and accountants before buying or refinancing of commercial and residential properties.
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