Has anyone used a Commercial Loan to finance a property?

Question

We have a property we are looking to buy but traditional residential loans will not be an option as my husband is self employed and they will not consider his income.  We are exploring the idea of doing a commercial loan but I am curious if anyone has any feedback as to advantages and disadvantages of going this route.  The loan would have a max term of 20 years.  We would have the option of doing either a fixed rate for 5 years (approx 4.25%) that then resets or a floating rates based on prime.  Thoughts?

Ray Arends · Answer

Hi Tawny,

I just went through the commercial loan process for the first time. The lender wanted two years personal tax returns, three years of tax returns from a partnership I was involved with as well as a PFS, a personal financial statement. The PFS was basically a list of assets and liabilities.

The numbers on the property I financed spoke for themselves. Good credit and a healthy PFS plus a 25 percent downpayment probably didn't hinder the process either. I went through a local bank that I had established a relationship with when I refied my primary residence.

The anxiety I experienced through the process was entirely my fault - it wasn't that big a deal. Exercise or develop a relationship with a local bank, and if they say no find out why and move on to the next one.

Best of luck!

Mike R. · Answer

5 and 10 years from now you should expect interest rates to be higher so i would push the bank for a 10 yr fixed period.  on a second note, i would think you could get a residential loan for a duplex despite your husbands self employed status.  not sure a commercial lender would bother with a duplex loan (too small)...check with a credit union...lots of self employed get residential loans

Tom S. · Answer

@Tawny Bloom  Good to see another investor from VT!  I've done a few commercial loans in VT and agree with the pros and cons of the posts above.  It's a fairly similar process to a residential loan in terms of tax returns, bank statements, except that they looked at the financials of the property as well.

All are 20 years with the 5 year reset, no additional fees when it resets.  You just get a letter in the mail saying what the new payment is.  Union Bank, Lake Sunapee Bank and National Bank of Middlebury all have great commercial lending departments, in my opinion.

Hope that helps!

- Tom

Mike Pena · Answer

I agree with @Ray Arends, you should check with a local bank or credit union that you have a relationship with.  I used a commercial loan too. The underwriting is much easier especially if the do the loan in-house instead of the secondary market.  Just go in tell the bank what you want to do and they should help you out. If you don't have a relationship then now is a good time to start one.

Negatives for Commercial loans. Generally higher interest rate, variable rates, amortization is generally 20-25 years( affects monthly payments, Cash flow), larger down payment and you and your spouse might have to personally guarantee the loan. However, every bank is different.

If you do a commercial loan you might consider putting the house in an llc.

Mike

Mark Creason · Answer

You definitely want to know what will happen to the rate at the end of 5 years.  Will probably re-set to a certain basis, let's say 250 over 5 year US swaps.  Will there be additional fees involved?  Is the loan recourse or non recourse?  Feel free to contact me if you want to discuss.  My firm would not do it, but can give you advice.

Tawny Bloom · Answer

I found one bank who will look at our case for a duplex but we haven't submitted any of the paperwork yet.  I didn't get any info on the floating rate as I am unfamiliar with it.  Do you have any words of wisdom here?  I am assuming after the 5 years they reevaluate based on the current rate environment.  Are these questions I should be asking at this stage?  We hadn't even considered the commercial loan route until my phone calls to multiple banks today.

Mark Creason · Answer

Tawny,

I am a commercial loan broker, but dont do residential.  A commercial loan should be obtainable based on the financials of the property.  On large commercial loans, we typically look at 30 year amortizations and 10 year terms.

What would you be looking at rate wise on the floating ARM?  How would the terms work on a re-set after 5 years?  Is there a max time on the loans?

Mark

Has anyone used a Commercial Loan to finance a property?

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