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The process of applying for a commercial lending loan can be complicated if you are not aware of the basics. By understanding the various aspects of these types of loans, you can equip yourself to handle the process, know what to be wary of, and see how you can benefit.
  1. I have found a property I want to purchase. How much of the purchase price will my commercial loan cover?
  2. What is an SBA loan? Will it work for me?
  3. How do I calculate the Net Operating Income on my property?
  4. What is a Debt Service Coverage Ratio and how is it calculated?
  5. What about my credit rating? How will that affect my chances of getting a commercial loan?
I have found a property I want to purchase. How much of the purchase price will my commercial loan cover?
In general, a commercial loan will cover between 60%-80% of a property’s purchase price. The amount financed will vary depending on the kind of commercial property and whether or not it is currently generating income. For instance, a multi-family property typically is deemed as one of the more conservative asset classes and often financing can be obtained for up to 80% of the property's value. However, higher risk properties such as gas stations or restaurants often require lower leverage of about 60%-70% unless it a borrower qualifies for an SBA loan.
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What is an SBA loan? Will it work for me?
An SBA loan is a Small Business Administration loan that is provided in conjunction with a traditional first mortgage lender and a second mortgage that is insured by the government. In order to qualify for this kind of loan, the owner of the property must have their business occupying at least 51% of the available square footage of the building. Many people prefer these because the Small Business Administration guarantees them. SBA loans are available with as little as 10% down on a property. However, these kinds of loans are not always easy to acquire. The application process is fairly extensive, and they may also require you to cross-collateralize your primary residence or other properties you own. Iif you wanted to access equity on these assets in the future, it may impede you from doing so. SBA loans may be perfect for some people, but they aren’t suitable everyone.
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How do I calculate the Net Operating Income on my property?
There is a basic method for calculating the Net Operating Income on real estate. First, you must add up all the income that the property generates on an annual basis. Income in this case, includes rent and any kind of other fees you may receive from owning property. From this total amount, you need to subtract all operating expenses generated as a result of operating this property. This includes items such as utility costs, property taxes, property insurance, management fees, association fees, repairs, and common area maintenance (CAM) expenses. Mortgage payments do not factor in the above listed expenses. The balance that remains is the Net Operating Income. The mathematical equation is reflected as follows:

Gross Income + Other Income - Vacancy rate - All Operating Expenses = Net Operating Income
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What is a Debt Service Coverage Ratio and how do I calculate this?
The Debt Service Coverage Ratio (DSCR) is an indication of the property’s profitability based on the Net Operating Income (NOI) it generates compared to the debt payment on the property. For example, if a property has a Debt Service Coverage Ratio of 1.50, it means that for every $1.00 spent to pay the monthly mortgage debt, the property generates a Net Operating Income of $1.50. The Debt Service Coverage Ratio on a property should be at least 1.25 for most properties to qualify for financing.

In order to calculate this amount, we divide the Annual NOI by the annual mortgage payment amount. This equals the Debt Service Coverage Ratio for the property. The mathematical equations is reflected below:

Annual (NOI)/ Annual mortgage payment amount = Debt Service Coverage Ratio
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What about my credit rating? How will that affect my chances of getting a commercial loan?
If you have approached a bank or financial institution to apply for a commercial loan, then your credit score and profile will most likely be taken into consideration. However, if you’re obtaining your loan through a broker or other non-traditional bank, while your credit history is factor, it is not as critical for loan qualifying. Financial net worth, personal cash flow, liquidity, down payment, property type, and the profitability of the property are generally more of determining factors than credit score alone. Credit history is sometime more important than credit score. For instance, a history of late payments and tax liens will probably have a negative impact on your chances of qualifying for a commercial loan even if  you currently have a high credit score.
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