Commercial Second Mortgage: ... Sometimes it's just necessary!
Commercial Second Mortgage ...
Nobody really wants a mortgage, especially a second one. But sometimes it's simply a must do. So what should you look for, or look out for as the case may be? Are there some good reasons to pick specific commercial mortgage lenders? What are the costs associated with an equity mortgage?
These are some of the questions we try to answer for you below, since money loans, hard money lenders and you, the customer may all have different goals and objectives in mind ...
Know More about a Commercial Second Mortgage
Often a commercial second mortgage is taken out at the same time as a first mortgage, and they generally have a much shorter term, like around five years. This is usually done when businesses need greater capital, and since two loans have to be paid back instead of one, it requires great thought before making a decision to obtain this type of loan.
Many times, people choose this type of equity mortgage over a traditional commercial refinance, since there are many less fees involved, and the benefits can be great.
Commercial mortgage lenders can help businesses:
- Buy the facility they plan to be in
- Grow an existing business
- Fund commercial and residential development
- Develop property in many other ways as well
For the most part, to qualify for a commercial second mortgage, you must be able to meet the bank or lending institution's requirements. The main criteria will usually be the ability to make the debt service coverage ratio to the total loan payments. Although some applications might be accepted if the company has a bad credit rating, it isn't terribly common. You usually have to show a good credit rating, or be able in some other way to prove that your business is credit worthy. And it should come at no surprise, you'll probably need to put some of your own money into the process up front.
You will also have to be able to prove that your business is both stable and is either making money, or is about to.
Equity mortgage lenders usually want to see your long-term financial plan to give them solid ground on which to stand that says a) you thought about it, b) you DO have a plan and c) it shows, if implemented, you will actually be able to pay back any money loans they award to your company. In fact the terms of the loan may greatly depend on how well you present that plan, in addition to what type of business you have, and the kind of premises or land you plan to purchase.
Interest rates for commercial mortgages are usually higher than residential type loans, and the most common for buisnesses is a fixed loan rate. This means the interest rate will stay the same throughout the entire period of the loan, which can be good or bad depending on the rate.
An equity mortgage for buisnesses will usually have a fixed period between 3 and 10 years.
Unlike traditional home loans, a commercial second mortgage loan isn't backed by government entities like Fannie Mae. That means more risk to the lender, and that means not only are the interest rates much higher than a home loan, but commercial lenders will most likely look deeply into the borrower's business, from physical and capital assets to management and overall customer structure before agreeing to provide any money to you at all.
Needless to say, this isn't usually a quick process, and that could mean getting a commercial second mortgage for your business may not be a good option. It certainly isn't for everyone, but if you can prove good standing, have the time to pursue good lenders, and do have the ability for to make money as a result of the cash influx this type of loan can provide ... they can be quite beneficial to the growth of your company.
Know What to Expect with a Commercial Second Mortgage
When attempting to secure a commercial second mortgage from any good commercial mortgage lenders, there are a few "good to know" things before even starting the process. One of those is that they are not like home mortgages. For example, unlike the home version, a commercial equity mortgage is not government backed. That means the hard money lenders out there are a lot more careful about who they agree to work with.
Another is that you need to expect to repay the loan well before the date it is due. Sounds simple you say? Sure - but believe me, some folks just don't get it. At least not in this area.
Next, unless you negotiate otherwise, you'll probably get a balloon payment type of contract. That means the borrower pays interest and principal on the mortgage as the terms state, and then, if you're not careful, you might have to repay the entire remaining balance in one "balloon" payment. That can be tough to do, and assuming you can requalify at the end of the balloon term, it can still lead to a refinancing nightmare. Every business suffers cash flow problems from time to time, and "Murphy's Law" predicts that will happen just about the time you need to refinance. So buyer beware ... watch for this up front and avoid it if at all possible. It's a land mine with foreclosure written all over it.
Point 3 - Most banks simply won't approve second commercial mortgages. So don't get discouraged when you hear a lender tell you they believe the borrower should only ask for an amount needed to fund current projects - not for things well into the future. That's a hard one to take, especially after making your presentation about how much the injection of cash will do for future profits. Just be ready for the comment.
Point 4 - Be prepared to come up with between 20-25% of the loan's value on your own. Yes, you're going in to get the money needed to fund your company ... but I promise, you will probably be asked for a substantial down payment. That can be minized by using a direct commercial lender, but you'll usually be charged a few points higher on the interest rate to do that. This all needs to be factored into the cash flow equation up front. Know in advance what you can do here, and do not sign up for a loan until the terms are right for you.
Point 5 - The asking amount you need from a commercial second mortgage loan will have a direct effect on which commercial mortgage lenders will even consider funding the request. For buisnesses interested in borrowing less than $5 million, look for a direct commercial lender or small bank local to your area. Loans larger than that may need to come from bigger banks, and depending on where your business is located, they may a bit distant. No rocket science here, just something to think about when you start the loan procurement strategy process.
Finally, be aware of the times you are in. Ok, that's obvious, but let me even be more so ... what I mean is ... do not comit to payments that will turn out to be greater than your ability to pay. Before you provide the lender tax returns, annual income statements, balance sheets and even a management plan for handling growth, look at cash flow, look at the buisness plan and come up with realistic numbers on your own. Then never deal with a company willing to give you more than you know you can afford. And yes, that sounds simple, but in the heat of battle - when payroll needs have to be met and you aren't sure how to do that - having a number in front of you that you already know you can't exceed will help avoid some pretty deep commercial second mortgage trouble.
Selecting a Commercial Second Mortgage Lender
Before you even start looking into an equity mortgage or a commercial second mortgage, it is helpful to be aware of the criteria used to determine who is accepted for a loan and who is not. Knowing this can save long hours, and the frustration of sorting through unwanted and unwelcome rejection letters.
First, you'll probably be amazed with the shear number of documents that have to be presented. Here are some that a typical commercial mortgage lender may ask for:
-Financial statements that go back three to five years
- Corporate documents in original form
- Business owner's own financial records
- Income tax returns
- Leases
- Asset statements
- ... and that's just a good start
If you're a small business, chances are pretty good you won't have all the documents many of the commercial mortgage lenders may ask for. If that's the case, and you try to proceed anyway, just know that your rejection rate will be fairly high. Knowing this ahead of time can save a great deal of anguish and frustration, since it can help keep you from even bothering to send loan applications that are almost certain to be rejected. The more documents that have to be turned in with loan application, the longer it takes to get approved (or rejected), and the more opportunities the lender will have to scrutinize your ability to repay the loan. Not that we recommend going with the lender who has the shortest list of documents to be submitted, we're just trying to point out that some companies are harder to deal with than others. It pays to shop around for sure.
Along those lines, (that various lenders will require different things), it's a smart idea to personally speak to the lender before actually filling out their loan request. Sounds simple, but remember - it's your commercial second mortgage, and you'll be living with it for quite some time - so go ahead and get an idea if this is a company you even want to deal with, right along with some indication if they will accept and approve a loan application.
Often non-bank loans, although they have a slightly higher interest rate for equity mortgages or commercial mortgages, will require much less paperwork - just be sure you plan to make all loan payments on time each month. If cash flow is an issue right now, then looking for these types of lenders could be your best bet.
If your business is one that doesn't use a large CPA firm on a regular basis, it is wise to go with the higher interest rate. It can be an excellent way to avoid all the extraordinary paperwork. We like to think on the positive side of things, but if you fear the financial test requirements of a particular bank, move on. In that case, it's definitely in your best interest to seek out other commercial mortgage lenders.
Speaking of the positive, what if your business does do very well? Will you want to pay off the load ahead of time? Will you need to sell the property and move into a larger facility to sustain your new growth? That could be wonderful, but you do need to think about it - before you agree to accept the lenders terms. Unlike home mortgages, there are often penalties associated with early loan pay off or early property sales. In some cases, the new property owner will be allowed to take over the payments, but not in others. Just make sure these are situations are clearly understood. Ask for no early loan payoff clauses and assumable loans. They are a great start at getting a commercial second mortgage you won't regret later.
Knowing what you need and what the various lending institutions require can make all the difference between getting a great commercial second mortgage lender and a really bad one. It can also mean less pain and frustration throughout the entire lending process as well.
Different Costs Associated with a Commercial Second Mortgage
Be forwarned - there are many fees and costs that come with a commercial second mortgage loan. You might not be able to avoid them, but at least knowing what to expect before you start negotiations will make it less surprising when it comes time to pay them.
For example, even though the stated interest rate from your selected commercial mortgage lenders, may be 9%, you still have to consider "points". If the lender assigns two points, then the actual interest rate will be 11%. not 9. This extra percent is intended to go straight into the hands of the lender, so it's certainly good to know upfront.
Some other fees are:
- Survey charges
- Legal fees
- Application fees
- Appraisal fees
- (... and anything charged against the loan, or must be paid ahead of time)
These costs can be quite significant, depending on the amount of the loan - and what's worse is the loan will usually not be evaluated for approval or denial until all fees have been paid. In other words, it is vitally important you are positive the loan will be approved before you pay for any of these.
Here are a few smart questions to ask your lender about commercial second mortgages:
- When the interest rates rise, will my interest rate go up as well?
- Are discounts available if I pay on time consistently?
- Is there a fixed rate option?
There are some commercial second mortgage lenders that will give lower interest rates if the mortgage is always paid on time. However, if you desire to pay the mortgage off ahead of time, then the lenders will usually make you pay greater interest through penalties.
Think carefully about how you think your business will be doing in a few years, and the way in which you will pay the loan back.
Although it is good to have a positive outlook about your business, you also need to have one that is realistic, since your business could be at stake if you fail to repay the commercial second mortgage in time. For many, the loans with the lowest interest rates are also the most risky for their business.
When searching for a commercial mortgage from a commercial mortgage lender who deals in equity loans, you should try to find one that will allow you to receive the loan within time constraints that are acceptable.
Borrowers need to keep banks and non-banks in mind when they are seeking the best loan to meet their needs. It is very important that the proper questions are asked, and that much research is done into various companies before making a decision.
Today, there are many more options for borrowers when it comes to a commercial second mortgage, as new lenders have sprung up to compete with banks to get borrowers lower interest rates and better terms as well.