Commercial loans

Owning commercial property is no longer just a game for the wealthy. Little known loans can make dreams come true.

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There are two basic commercial loan types: traditional, and hard money loans. Traditional loans are usually obtained through standard channels such as banks and lending institutions. Hard money loans are obtained mostly through private lenders.

Traditional loans

Traditional loan lenders want to know their money is protected. This allows for a loan that is more conducive to watching out for the bank rather than taking the buyer’s needs into consideration. The lender puts the buyer through hoops in order to verify his capability to repay the loan. Extensive income verification is needed, including copies of tax returns, in addition to requiring the buyer to sign IRS form 4506. This form allows the lender to directly contact the IRS to obtain knowledge of the buyer’s tax history.

The commercial lender will nonchalantly tell the buyer that form 4506 is simply a routine request, or a small detail needed to complete the loan process. It is usually requested just prior to the final closing, so the buyer is blindsided. In all actuality, the use of this form can have a long lasting adverse affect on the commercial buyer’s financial concerns.

Commercial borrowers are often shocked when they discover, well after closing, that the traditional lender has created certain requisites within the loan contract allowing for a financial audit whenever they desire. If, for some reason, any reason, the audit does not meet with the lender’s satisfaction they simply recall the loan; leaving the borrower up the proverbial creek without a paddle.

Hard money loan

In use for over 50 years, the non-conventional hard money loan is not made through traditional lenders such as banks. Usually these loans hold the first lien on a commercial property, and occasionally a second lien known as mezzanine financing. Completed more quickly than a traditional loan, hard money loans are widely used when conventional financing is not an option.

For the most part, hard money loans require an interest rate from 4-8% above prime, and have higher fees and shorter terms. With this said, since hard money loans offer interest only terms, the payments are often lower than a fully reimbursed, lower interest loan. The following is a list of common reasons to use a hard money loan.

  • Low credit scores
  • Need to obtain a loan quickly
  • Aggressive loan to value ratios
  • Foreclosure
  • Bankruptcy
  • Special Purpose Properties
  • Tax Liens
  • Losses
  • Negative net worth
  • Less than a year in business
  • Environmental requirements.

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