Posted by John Doe
Most people are somewhat familiar or will be at some point in their lives, with a conventional mortgage. These loans from authorities and banks can be life changing, providing people with the capital they need to buy a home and start putting down long-term roots while acting as a solid investment to boot.
However, there is another side to the world of mortgages, focused less on residential use and more on new property. This loan is called a commercial mortgage, and there are a number of reasons why you might want to use one. But before you do that you need to know exactly what it is, and that’s where this article is ready to assist. Read on to find out more about this type of financial instrument and why you might need one right now.
What is a commercial mortgage?
A commercial mortgage is a useful loan that can help you expand on existing property, finance brand new property if you desire, or even act as a way for you to completely consolidate your debts in one easy place.
Basically, it’s the same as any other mortgage loan, except it’s taken on a commercial real estate property with the property that you’re focusing on taken in as collateral. The borrower for this type of loan can be a corporation, a limited company, a partnership or any conventional enterprise.
The commercial mortgage loan itself can be used essentially to finance any desired purchases of hotels, offices, industrial properties, construction sites, stores, or even in certain circumstances, a residential real estate property. For the latter, it can only be the target if it is being used as an investment property.
The residential real estate can fall into one of three categories: a pure residential unit that falls between one to four units, a pure residential with five or more units, or some sort of residential commercial mixed property.
With the same powers as any mortgage, you can use this financial instrument to quickly afford to buy up property and use it for your enterprising needs. The max loan to value ratio on this type of property can range widely from as low as 55% to as high as 80%. Of course, just because you can, doesn’t mean you should take out the largest loan available. This is why you need to talk to an expert like Canada Mortgages.
And to answer the other question, if you’re planning on picking up commercial property or really any type of property that you hope to make revenue from, then you likely will need a commercial mortgage.
The Technical Aspects
There are a few more things you should consider, like the actual characteristics of the mortgage you’re taking out.
Commercial mortgages come in a variety of types, from an adjustable rate to fixed rates. Adjustable rate mortgages are much riskier for the borrower, but they might help you qualify for a larger loan amount.
You should also keep an eye out for interest only loans that can be taken out if you’re able to show that the property’s future profits will grow over time. This type of loan makes it possible to take out much smaller monthly payments over a period of time, reducing your debt burden.
You can also take out second mortgages on commercial properties. Of course, this is something you should avoid doing if it’s at all possible. However, if you’re in need of funds desperately and you have no other choice, then you can quickly get cash through this method. Just remember that you’ll be incurring a much greater debt.
Other commercial financing options include bridge loans, land development loans and other options, but they’re likely beyond the scope of this article.
What Lenders Look For
So you need a commercial property, meaning you’re going to have to take out a commercial mortgage. Now that you’re on this step you’re probably wondering what exactly it is you’ll need to qualify for one of these babies.
The criteria are similar to a normal mortgage but the thresholds you need to cross tend to be higher because of the increased value of the property. You’ll also have to wait longer, with these sorts of loans taking anywhere from 2 months to a year to clear properly.
The main criteria that will be examined are the debt service coverage ratio. Basically, this is the ratio of loan payments required held against the actual amount of cash you have available. There will essentially be a loan-to-value ratio that will require some investment of your own money to balance out the scale so that you can properly qualify.
Just as important is your credit history. Most lenders will require that you have a solid credit score, think in the 700s or higher. There can be lenders that accept applicants with a less than perfect credit history but they are few and will come with their own downsides.
Lastly, they’ll consider your business circumstances. Basically, they’ll look at whether your business is profitable and steady, what your financial projections are and your general business plan. You’ll need to make sure you have liquid capital and a decent net worth of at least 100 thousand dollars.
The funny thing is that the answer to what a commercial mortgage is and whether you need one come entirely hand in hand. Once you know what its purpose is for you, you will instantly know whether you need one, based on whether or not you need to buy a commercial property.
Now that you’ve learned all you need to know about commercial mortgages and their uses, as well as deciding if you might need one, you may be wondering how to get your hands on commercial mortgages in Canada. Thankfully this isn’t a journey you have to go on alone. In fact, there are experts that can help like us at Canada’s Mortgage, the country’s premier mortgage authority.
If you would like to know more about commercial mortgages, call Mortgages Mortgages at 866-307-0747 or contact us here.