5 Steps To Get A Commercial Loan - How to Get a Commercial Loan
Published 04-03-2019

How to Get a Commercial Loan in 5 Steps

Many new commercial borrowers are familiar with the process for obtaining a home loan—you find a lender or loan officer, submit income and tax documentation, present property information, and after a bit of back and forth, hopefully obtain the loan approval. However, the commercial lending process is substantially different. If you require a commercial real estate loan it is important that you have an in-depth understanding of the process. In this guide, we will review the five steps you need to know in order to apply and get approved for a commercial real estate mortgage.

Step 1: Identify a Property and Put it Under Contract.

Your first task is to find the right property and to execute a Purchase & Sale Agreement. Although every situation is different, there are established methods of determining whether a property is right for you. The three biggest key factors involved in finding your ideal property are: 1) determining your perfect market, 2) hitting your budget, and 3) meeting your return requirements.  

The market you choose is the most significant variable influencing the success or failure of your investment. There is a saying in the commercial real estate world: "you can control your property, but you can't control your market."  What this boils down to is the fact that you have little to no ability to influence overall growth in your geographic market beyond your actual CRE portfolio.

The due diligence and market research you perform before purchasing a property is the best way to set yourself up for investment success. You want to examine vacancy rates in the area, property tax codes, prevailing lease rates, crime rates, and other factors that influence current and future growth, both for the property itself as well as the surrounding area.

After you have decided to move forward with the purchase, your next step is to put the property under contract. You will need to enter into negotiations with the seller and reach an agreement on the terms of sale. These terms are laid out in Letters of Intent or Purchase and Sale Agreements. Ideally, you want to ensure that you have enough time to perform due diligence on the subject property and the related financial reports like rents collected, upkeep costs, etc. Adding contingencies regarding the potential inability to secure financing is also a good idea to protect yourself if you are unable to find available credit, or the property is ineligible to serve as collateral for a loan.

Whether you are a new or seasoned investor, it’s always a good idea to review our Top 5 Commercial Real Estate Investing Tips.

Step 2: Prepare your Financial Package

For Existing Properties

Every commercial lender will have different underwriting requirements for their loan programs, which is driven by risk level, loan amount, property type, and other factors that can change the list of items they will request. For both purchase and refinance requests, they will ask for property-related information like the address, date of construction, operating statements, rent rolls, as well as a slew of documentation on the borrower and desired loan terms. For refinances, most lenders will also ask for the name of the current lender and payoff amount for the loan (including any prepayment penalties), property tax returns, and a schedule of capital expenditures for the last several years. For a full list of typically required commercial loan-related items including Borrower/Sponsor-Related Documents and Property-Related Documents, check out How to Prepare a Financial Package for a Commercial Loan.

For Commercial Construction

Construction loans require a much more extensive and complicated underwriting, and therefore have a much longer list of document criteria. In addition to much of the information required for existing properties, this documentation includes executive summaries, drawn/potential permits, regulatory letters, marketing plans, and more. For a comprehensive list of what you need when applying for a commercial construction or bridge loan, head over to How to Prepare a Financial Package For a Commercial Loan.

Step 3: Submit Financial Package for a Quote

Commercial Loan Direct offers over 300 lending products nationwide, representing banks,  insurance companies, private lenders, securitized lenders, and other financial institutions. We save you time and money by underwriting your property and searching our database for the most aggressive and up-to-date rates and terms for your specific property. Reduced rates and fees are available to our borrowers because of our pre-negotiated terms and volume-based discounts that would not otherwise be available to borrowers directly.

So once you have assembled your loan package, it’s time to find a commercial real estate loan product that matches your investment criteria. With our online loan finder and individual loan product pages, it has never been easier for commercial borrowers to get acquainted with which loan products meet their specific needs and review current interest rates. However, because each transaction is priced on a case-by-case basis, the financial package would need to be submitted in order to get specific quotes on the products that most closely match the borrower’s requirements. Because Lenders have different rates, terms, lending criteria, and loan specials which can change on a monthly or even daily basis, one of the easiest and most advantageous paths is to work with Commercial Loan Direct to help navigate the hundreds of loan products that are available and negotiate the best possible rates and terms, which saves the borrower substantial time and money, and all for no up-front fees. We make applying for your loan quote easy through our streamlined application process.

Step 4: Choose a Loan Product

Every borrower’s needs and goals are unique, and the commercial loan options should reflect that. Some investors are in it for the long haul, while some are value-add for a shorter term flip. While everyone focuses heavily on interest rates, there are many other variables involved in choosing the right loan including amount, term, recourse, and prepayment penalty structure. The financial product an investor chooses should align directly with their criteria, so we spend time with the sponsors up front to understand the investment strategy for their property and portfolio in order to narrow in on the most relevant products. In fact, most borrowers will receive multiple loan options from different institutions so they can choose the best product for their needs. Remember that obtaining a loan is a significant investment of time and capital and we want you to be confident that the product you choose is right for your situation, which is why we think it’s important to see what our clients are saying about our services.

Step 5: Due Diligence & Closing

Before the Lender can close the loan, pre-closing due diligence must take place. There will be three primary categories of due diligence—legal, financial, and third party reports. Legal includes the review of organizational documents, tenant leases, and estoppel certificates, among other items. Common financial diligence documents include historical operating statements, rent rolls, capital expenditure schedules, and purchase and sale agreements. Finally, third-party reports are performed by companies unaffiliated with the lender. These include appraisals, credit reports, zoning reports, and more. For a full list of legal, financial and third-party due diligence required by commercial lenders, see the individual product pages for the loans you are interested in.

Commercial Real Estate Loan FAQs

What Do You Need to Qualify for a Commercial Loan?

Like snowflakes, all lenders and loan programs are different and can vary substantially, but there are some common items that most lenders will ask for including:  

  • Schedule of Sources and Uses

  • Loan Amount/Payoff

  • Requested Terms (i.e. fixed/variable interest rate, term length, amortization, recourse, etc.)

  • Personal Financial Statements and Liquidity Verification

  • Real Estate Resume

  • Annual Operating Statements and/or Tax Returns

  • Capital Expenditure Schedule

  • Rent Roll/Leases

How Long Does It Take to Get a Commercial Loan?

The type of loan and lender you select ultimately determines your closing time frame. For hard money lenders (not offered by Commercial Loan Direct), you can receive funds in as few as 5 to 30 days. With conventional loans, you can expect to wait between 30 and 60 days. Fannie Mae, Freddie Mac, and CMBS loans take anywhere between 45 and 60 days. FHA loans disburse funds within a 6 to 12 month period. Small Business Administration and USDA loans take between 60 and 90 days, while bridge loans take at least 60 days and construction loans take 90 days or more. Once you have a clearer picture of your loan type and lender you will be able to determine roughly when funds will be available.

How Much Money Do You Need to Put Down on a Commercial Property?

The amount of money down for a commercial loan depends on the individual lender/loan program, but minimum down payments generally range between 10 and 35 percent for most loan products.

How Can I Buy Commercial Real Estate with No Money?

It is possible to purchase commercial real estate with no money down. However, it is not always a good idea. This type of investment is very capital intensive, and unless you have access to capital you may find yourself struggling with most commercial real estate projects. With that in mind, if you feel you can manage the risk or locate funding sources down the line, there are a few ways that you can purchase commercial RE with no money down.

Seller financing is somewhat common in the industry. In these deals the seller helps to finance the purchase. You can also tap your personal networks, like friends and family, or even create a partnership with another investor. Some investors have also used HELOC loans, which allow you to withdraw cash equity from your primary residence.

About the Author

Leanne is a JD/MBA and works as a Managing Director for Commercial Loan Direct, specializing in large balance transactions, portfolio loans, and complex financing structures. When not negotiating the best deals for her clients, you can find Leanne in the yoga studio or snowboarding up in the Rockies.