Types of Commercial Real Estate Loans (Including Non-Qm)

A commercial real estate loan is a mortgage that can be acquired using the business property as collateral or backup. These loans can be divided into three major categories: business loans, investment loans, and loans for development. Commercial real estate (CRE) includes any revenue-generating property utilized for commercial activities, such as offices, shops, hotels, restaurants, warehouses, and apartments. Loans for commercial real estate are only used to purchase commercial property; they are not used for buying private homes.

However, residential properties with 1-4 units managed by an LLC can use commercial loans. Banks and lenders are in charge of offering commercial real estate loans, just like with any other kind of mortgage loan. Loans for residential real estate are granted to private borrowers, while loans for commercial real estate are given to commercial enterprises, including organizations, Limited liability companies, investors, and developers. Small businesses looking to buy, develop or refurbish their facilities could apply for a CRE loan.

Loans for commercial real estate are typically given to investors, including businesses, developers, partnerships, funds, trusts, and REITs. CRE loans are available to companies established with the express aim of acquiring and managing commercial real estate. The company buys real estate for commercial use, rents out space, and then collects rent from the companies using the property. Commercial real estate loans are used to finance the endeavor and purchase, expand, and construct these properties. Commercial real estate includes large-scale properties such as:

• Apartments
• Shopping malls
• Retail centers
• Warehouses
• Multi-use properties
• Hotels
• Condos
• Single-family homes
• Townhomes
• Office buildings
• Multi-house properties with 5-20 units, etc.

Surprisingly, investors can build their portfolio with many properties at once because there is no limit on the number of homes or loan amounts in it. Compared to residential loans, CRE loans are usually more expensive. Often, 20% to 30% of the loan amount is deposited as a deposit or down payment. A common range for interest rates for borrowers is between 10% and 20%.

Non-QM investment loans satisfy the requirements of seasoned investors with rental property assets. Even though they are more expensive, non-QM loans are simpler to obtain. In addition, experienced investors are concerned with increasing their monthly income flow and accumulating wealth over time, which means that the more freedom they have to accomplish their bigger investment goals, the higher their investment property mortgage rates will be.

As of July 2022, fixed-rate loans varied from 5.0% to 6.0%, while variable-rate loans varied from 2.25% to 4.25%, depending on the loan’s amount and duration. Loans sponsored by the Small Business Administration (SBA), which are among the most affordable, fell between these ranges. When assessing CRE loans, lenders take into account the type of collateral, that is, the property being bought, and the financial status of the entity or owners, which includes 3-5 years of financial records, income tax returns, and financial ratios.

Benefits of a Commercial Real Estate Loan

Getting commercial real estate investment loans for property ventures has many advantages. You can expand your real estate investment portfolio and increase your return on investment by investing in commercial real estate. The following are some of the significant advantages of commercial real estate loans:

In some cases, the following applies;

• No requirements for tax returns
• Variable and fixed rates are available
• No requirement for personal income
• No requirements for debt
• Close the loan in the name of your LLC, while you must personally assure the loan

However, these excellent advantages make it easier for borrowers to be eligible for commercial real estate loans.

Types of Commercial Loans

There is no such thing as a universal real estate loan. Each borrower may have different needs, and each borrower may choose a different property to secure the loan against. Depending on the real estate project, several commercial real estate mortgages are available with various rates, conditions, and purposes.

1.Long-term Fixed-interest Commercial Mortgage

This is a typical long-term commercial loan obtained from a bank or lender. Although this financing is similar to home loans, it has shorter terms and a wider range of applications. The repayment plan barely exceeds 20 years, the interest rates might be as high as 7%, and the term could be as low as 4%. Depending on market conditions, interest rates may go up or down, but the payment and interest stay constant with a fixed-rate loan. The borrower’s personal FICO credit score must be 700 or higher to qualify for long-term fixed-interest commercial loans. Other criteria include the owner’s business has operated for at least a year and occupying at least 51% of the commercial property.

2.    Soft and Hard money loans

Hard money loans can be obtained from private investors, whereas soft loans combine the benefits of a traditional mortgage and a hard money loan.

• Hard money loans:  Since private lenders or investors make most of the hard money loans, greater down payments may be necessary. Hard money loans include shorter durations, higher interest rates, and interest-only payments. They fund more quickly than a traditional mortgage and are also easy to apply for. The amount of money is determined by the value of the business property rather than the borrower’s credit score, typically examined by banks and other financial organizations. This can be borrowed for short periods, from 6 to 24 months. The disadvantage of hard money is the high-interest rate that must be paid (10% to 18%) in addition to more expensive upfront expenses.
• Soft money loans: Soft loans are a combination of a hard money loan and a traditional mortgage. Soft money lenders put more emphasis on creditworthiness than hard money lenders, who prioritize property value. The interest rate on a soft money loan may be lower with a higher credit score. Soft loans have shorter terms ranging from 6 months to a few years. They may be an excellent choice for borrowers who need to close a home quickly but don’t want to pay the high-interest rates associated with a hard money or bridge loan.

3.    Bridge Loan

Similar to a hard loan, commercial real estate bridge loans have lower interest rates that range from 6.5% to 9%. Additionally, this financing option includes lengthier terms of up to three years and a wait time from approval to funding of 14 to 45 days. Business owners need a credit score of at least 650 to approve this loan from a traditional lender. The typical range for down payments is between 10% and 20%, and they frequently close more quickly than traditional real estate loans. Short-term investors that want to build or remodel a home before a larger, more thorough refinance usually take the bridge loan.

4.   Construction Loan

Construction loans can be used to pay for the material and labor costs of constructing buildings, including apartments, residential rentals, industrial facilities, offices, and storefronts. Undeveloped land and even already-bought building supplies might be used as security for a loan. It often converts to a long-term mortgage after the period, which is between 18 and 36 months.

5.  Blanket loan

Businesses can consolidate numerous properties into a single financing plan for simplicity and flexibility under a commercial real estate blanket loan. If the borrower owns eleven properties, he can sell two of them without paying any penalties and utilize the proceeds to make new investments. Although blanket loans have some positive aspects, such as less documentation and increased investment opportunities, they are complicated mortgages that are challenging to obtain. Additionally, there are huge payments and even higher default fees.

6.    Traditional commercial mortgage

Traditional commercial real estate loans typically require more stringent qualification standards than other commercial loans. Banks like to work with entrepreneurs with strong personal credit and a high debt service coverage ratio (DSCR), demonstrating to lenders that your company is making enough money to pay back the loan.

Unlike other alternative financing products, traditional mortgage loans typically have interest rates lower than prime rates, such as the Wall Street Journal (WSJ) Prime Rate. These rates are typically a few percentage points below prime. Some banks offer complete amortized loans with extended duration of up to 20 years and typical loan-to-value ratios of up to 80%. Other banks might offer ten-year interest-only loans with 65% loan-to-value ratios.

7.    SBA 7(a) loan

The 7(a) loan is the SBA’s most popular loan. It can be used to buy land or buildings, build a new property, or reconstruct existing property as long as the real estate will be used for owner-occupied purposes. Under the SBA 7(a)b loan, a lender connected to the SBA can grant you up to a $5 million loan. A 7(a) loan’s interest rate cap may be constant (11.25%), variable (8%), or a mix of the two. The prices are determined using the lowest prime rate, the 30-day LIBOR rate, or the SBA optional peg rate. For 7(a) loans used for real estate, the repayment period may last up to 25 years.

8.   SBA 504 loan

SBA 504 loans are only available for long-term equipment purchases or owner-occupied real estate. They are made up of two separate loans, one from a Certified Development Company (CDC) for as much as 40% of the loan amount and the other from a third-party lender for as much as 50% of the loan amount. It will be the borrower’s responsibility to make a down payment of at least 10%.

The total amount of the project being financed may be as much as $10 million or more because the CDC’s share of the loan may range from $5 million to $5.5 million. You may apply for loans starting at $25,000 minimum. As of May 2021, the interest rates on the CDC part are fixed and may range from 2.623% to 2.887%. The third-party loan’s interest rate has a maximum limit of 6% over the New York prime rate or the highest interest rate allowed in that state, whichever is lesser. It may be fixed or variable with a maximum duration of 25 years.

9.    Conduit/CMBS loans

Conduit loans are asset-backed commercial mortgages. Lender provided numerous commercial real estate loans to investors on a secondary market after collecting them together. Conduit lenders typically offer to finance for sums ranging from $1 million to $3 million and up to $50 million, with durations of five to ten years, amortization periods of 25 to thirty years, and loan-to-value ratios around 75%. The same amount will be due every month up to a final balloon payment at the end of the loan term. Conduit loans usually have set, cheaper interest rates than traditional loans.

10.   No Income Verification Investment Loan

No-income verification investment loan is one of the most common non-QM loan types, especially for real estate investors who lack stable income evidence. In other words, they can apply for a mortgage using their portfolio.

11.    Bank Statement Loan

If you just have access to your personal or company bank statement to prove your ability to repay a loan, bank statement loans are a perfect option. This can be an excellent substitute for traditional mortgages for anyone who is self-employed or owns a business. Instead of using W2s and tax returns to demonstrate income, you can use your personal or bank accounts to apply. These loans are perfect for self-employed borrowers or independent contractors who don’t satisfy the agency’s standards due to their tax returns.

12.     Jumbo Loan:

Jumbo loans are frequently needed to make a down payment of at least 20% of the total loan amount. However, this may be excessive for some borrowers. An advantage for those with good credit debt, such as student loans, is that non-QM loans may require a 10% down payment. A jumbo loan is larger than the maximum amount permitted by Fannie Mae and Freddie Mac, which is $548,250 for 2021. Borrowers of jumbo loans can be investors seeking more money than the agency maximum, second-home buyers, or owner-occupiers.

13.     Foreign National Loan

Foreign national loan schemes are intended for non-citizens who want to buy real estate in the US. The Foreign National Loan is the best option for borrowers without a Social Security Number, US credit score, or Tax ID number. It has distinct standards because it is designed for temporary occupants. Specifically, a greater down payment and a maximum LTV ratio of 70% are required. Although foreign nationals are not eligible for loans from Fannie or Freddie, other financing schemes are still available for them.

Types of Commercial Lenders

Several significant banks and financial institutions issue commercial loans for a predetermined term and interest rate. It is important to note that there are numerous lenders available online; hence, you should thoroughly investigate them before approaching them to avoid being in a mess. Some of the lenders for commercial real estate mortgages include:

1. Banks: Banks include national banks, credit unions, and community banks.
2. Small Business Administration: Small firms who desire to buy, restructure, or develop owner-user commercial real estate can do it with the help of SBA’s commercial real estate lending programs. SBA 7(a) loan allows for property purchases and debt refinancing for commercial real estate. SBA 504 loans are used to design, outfit, and erect buildings for commercial purposes.
3. Private/Institutional Lenders:  Private and institutional financers provide long-term and short-term mortgages.
4. USDA: The US Department of Agriculture (USDA) is controlled by the USDA’s Rural Business and Coop Program, which provides loans to commercial businesses.

Which Commercial Real Estate Loan is right for your Business?

Before choosing a commercial real estate loan, you need to run a background check on the loan program, its requirements, and your needs. One of the pointers to guide you in selecting the best commercial real estate loan is how fast or quickly you need the funds. Every loan program has its duration and terms; you should apply for a loan that meets the time you need the loan. For instance, an SBA or a traditional commercial mortgage loan might not be the best choice if you require quick funding, as it could take months for these financing options to fund, making you lose commercial property bidding. A faster choice would be a commercial bridge loan, which can be secured in a short period.

Your qualifications also matter when choosing a commercial real estate loan program. Your background and qualifications will limit the types of financing you can plausibly get. You might be eligible for a traditional commercial mortgage loan with fair interest rates and longer payment terms if you have good credit and your company has a high debt service coverage ratio. On the other hand, you have better success with a hard money lender if you have bad credit, but it comes with huge interest rates.

How Aurum and Sharpe can help you get Non-QM Mortgages for Investment Property

Aurum and Sharpe offer non-QM mortgages used for business purposes. We offer loans to LLCs and other commercial companies. If you want low-interest commercial real estate loans, you should consider Aurum and Sharpe as your lender. To help our clients get the most out of their non-QM mortgage loans, Aurum and Sharpe work to develop tailored loan solutions that are crafted to each borrower’s specific financial state. Our team has years of expertise and is well-versed in the loan process to guide you through each stage to quickly and easily acquire a loan. Learn more about Aurum and Sharpe to start your commercial mortgage journey seamlessly.

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