If you go into seeking a Commercial Real Estate Loan with the right expectations and telling your “story” with the appropriate documentation, you can greatly increase your odds of getting your loan approved. We will first discuss setting expectations and next month we will discuss telling your “story”.
As the borrower you need to have the right expectations going into the process.
Interest Rates: For strong, income producing projects with borrowers that have good credit, liquidity, and experience you can get interest rates in the 4% to 6% range. If your income producing project lacks in one of those areas, then you might slide into “soft money” which is in the 6% to 10% interest rate range. If you or your project is weak in several of those areas or you are in a distressed situation (Foreclosure, stalled, etc.), then you will likely fall into “hard money” interest rates of 10% to 15%.
Costs: Costs can often be rolled into the loan, but it needs to be remembered all the fees are still there. From background and credit checks to title and escrow. Fees could add up to around $10,000 at the lowest.
Points: Points are also dependent on the risk associated with your project. Points and origination fees can range from 1% to 12% and are used to cover the cost of originating the loan and or build the yield of the loan.
Prepayment Penalties: Many of the 4% to 10% interest rate loans or loans with low points have prepayment penalties. Those penalties can range from a percentage of the loan amount to a minimum number of months of interest paid on the loan. Most “hard money” loans do not have prepayment penalties.
Term of the Loan: Some loan terms go to 30 years, but most loan terms do not go beyond 10 years while “hard money” loans which are there to bridge you through a period of time are often written for short terms of 6 months to usually no more than 36 months.
Loan to Value (LTVs): Most commercial LTVs ratios go no higher than 75% while some will go to 85% or even 90% for the strongest of loan requests but are rare. Most “hard money” loans cap out at about 65% LTV while land has a maximum LTV of 30% to 50%.
Timing: “Hard money” loans are the fastest at 10 days to 45 days. “Soft Money” loans come in second at 3 weeks to 45 days. The best rate loans take 45 days to 60 days while SBA and USDA can take 3 months or more.
Personal Guarantee (PG): All lenders like for you to think you are on the hook for the loan so many will require a personal guarantee. The past few years have proven that most of the time a PG is not worth the time or cost to try to collect on. So, you might be able to get the lender to accept a “bad boy carve out” guarantee which is a PG only in the case that you committed fraud, etc.