Avoiding Common Mortgage Misconceptions
Securing commercial finance mortgages is a time-consuming and complex process. So it's understandable that borrowers can often get the wrong impression of how the industry works. Here are a few typical misconceptions you should be aware of.
Commercial finance mortgages work the same as residential mortgages.
Commercial and residential mortgages are similar in many ways, but there are some important distinctions. Commercial finance mortgages require significantly more documentation, a higher up-front investment, and greater due diligence on the part of the lender. Also, the appraisal process takes more time and is costlier than a residential appraisal. Finally, while consumers can get 100% financing for their home, businesses don't have that option.
My strong credit rating will help me get the best deal.
For commercial finance mortgages, you need more than a high FICO score. You must prove that your business has a steady, positive cash flow to get approved. Also, while you can use personal equity for most other loans, commercial mortgage lenders only consider the property you are looking to finance as collateral.
The lender has a vested interest in my success.
A lender's only concern is that they get their monthly payments on time: if you can't make the payments, they won't hesitate to foreclose. However, their neutrality works in your favor, as well: even if the value of your building doubles in the first few years, the lender won't foreclose to get an extra piece of the profit.
A balloon payment is a waste of money.
While the prospect of making a large lump-sum payment at the end of the loan isn't something to look forward to, it does offer several benefits. Having a commercial finance mortgage with a balloon payment provides lower monthly payments and interest fees which frees up cash to grow your business. At the end of the mortgage, you have the option to refinance the lump sum into a new loan at a fixed rate.
As long as I make regular payments, I can't lose my property.
Keep in mind the lender has the right to ask for financial covenants - updated documentation on your company's financial health - to ensure you don't default on the mortgage. If it appears your business may struggle for a while, the lender could exercise the right to foreclose even if you find a way to pay the mortgage. It's very important to check with your lender about whether or not they require financial covenants.
Renting out my additional space will be easy.
Additional office space is a valuable commodity - but only when you have businesses that fill it and pay rent. If you purchase a multi-business property such as a strip mall, but have several open leases, you won't be generating enough income to repay the mortgage. Make sure you have businesses lined up to lease the space and meet rent rolls.
There may be other elements of commercial finance mortgages that seem confusing. Make sure to address any concerns with the lender before you begin working with one. Submit your free BuyerZone request for commercial finance mortgage quotes today and get matched to several brokers who can help you find the best rates.
For more detailed information on commercial mortgages, read the BuyerZone Commercial Mortgages Buyer's Guide.Ready to Compare Commercial Mortgages - INACTIVE Price Quotes?