Know More about a Commercial Second Mortgage
Reposted by: Leah Henderson Columbia, SC Realtor
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.
Commercial Second Mortgage
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.