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What is a commercial mortgage?
A commercial mortgage
document spells out how you must maintain the underlying collateral
for a commercial real estate loan and
the remedies available to the commercial lender should you default
on the promissory note or fail to maintain the collateral in a satisfactory manner.
What is a commercial loan?
The term "commercial loan" is
sometimes used interchangeably with "commercial mortgage," and for
the sake of argument, this is acceptable. However, the two are
really quite different. A commercial loan is:
monies provided by a commercial lender to the borrower, individual
or corporation, in exchange for the borrower collateralizing the
loan with the commercial real estate. A
commercial mortgage is: the
instrument that perfects the lien on the collateral, provides rules
for properly maintaining the property, and the lender's remedies in
the event of default on the commercial loan note.
How do I qualify for a
commercial mortgage?
You don't qualify for a commercial
loan! The
commercial real estate is the predominant factoring in the
qualification process for commercial mortgages. However, with that
said, you the guarantor can either positively or negatively impact
the qualification process for your commercial loan. If this is
confusing, this example may help clarify:
The commercial real estate is the
collateral for the commercial loan. Therefore, we must first look at
the underlying asset as the source of repayment for the commercial
loan. For example, you have a 16 unit apartment building in
which you are seeking to refinance. CommercialBanc will first
look to the apartment building as a source of repayment for the
loan. We will look at the properties rent roll and determine
the annual income and expenses for the property and simply determine
if the annual cash flow can service the debt. This is a very
basic equation for quickly calculating the properties DSCR.
The
DSCR equation looks like this:
Annual Income - Annual Expenses /
Annual Total of Loan Payments = DSCR
Here is a bare bones quick and dirty
method to determine a commercial loan's DSCR:
Annual Income ($100,000) - Annual
Expenses ($12,000) = $88,000.
So, we have $88,000 in annual free cash flow to service the debt of
the commercial loan or
apartment loan.
Now we calculate the annual debt for
the collateralized property:
Annualized Monthly P&I Payments
($65,000). Now we can determine the FIRST and most important
step in the prequalification process for you commercial loan or
apartment loan.
Annual Income - Annual Expenses
($88,000) / Annual Total of Loan Payments ($65,000) = DSCR (1.35)
A DSCR of 1.35 means the annual cash
flow from the property can cover annual debt from the property 1.35
times. This is a good DSCR. CommercialBanc underwrites most of its
commercial loan requests or apartment loan requests at a minimum
qualifying DSCR of 1.2 times.
If the minimum DSCR is met,
CommercialBanc will next look at the guarantor and determine
eligibility.
learn more about
commercial mortgages and commercial loans
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