Introduction: The Tough World of Commercial Real Estate Loans
Securing a commercial real estate loan can be incredibly challenging. You discover an excellent property and submit your application, but then receive disappointing news – the bank has declined your request. Once again.
If you’re facing repeated rejections for your commercial real estate loan, don’t lose heart. Many others are in the same boat. Lenders are extremely selective when it comes to commercial real estate loans. They scrutinize every aspect of the application before approving.
This guide aims to help you understand the reasons behind commercial real estate loan rejections. We’ll also provide insights on improving your application. Whether you’re a novice or experienced in seeking commercial real estate loans, these tips will prove beneficial.
What’s in a Commercial Real Estate Loan Application?
Before we talk about rejections, let’s look at what goes into an application:
- Your personal and business money details
- Information about the property
- Your business plan
- Your credit history
- How well you can pay back the loan
- How much of the property’s value you want to borrow
- Your experience in real estate
Now, let’s look at why applications get rejected and how to fix each problem.
Reason #1: Not Enough Down Payment
The 20% Rule: Why It’s Important
Banks often say no if you don’t have a big enough down payment. Most want you to pay at least 20% of the property’s value upfront.
How to Fix It:
- Save more money for a bigger down payment
- Find partners to help with the down payment
- Ask the seller if they can help with financing
Reason #2: Bad Credit History
How Your Credit Affects Your Loan Chances
Your credit score is very important. If you’ve missed payments or had money troubles before, banks might worry.
How to Fix It:
- Check your credit report and fix any mistakes
- Pay off some of your debts
- Always pay your bills on time
Reason #3: Not Enough Cash Flow
Understanding Debt Service Coverage Ratio
Banks use something called DSCR to see if you can pay back the loan. If your DSCR is below 1.25, banks might think it’s too risky.
How to Fix It:
- Try to make more money from the property
- Cut down on expenses
- Ask for a smaller loan
Reason #4: Borrowing Too Much of the Property’s Value
Finding the Right Balance
Banks prefer if you borrow 75% or less of the property’s value. If you ask for more, they might say no.
How to Fix It:
- Make a bigger down payment
- Look for cheaper properties
- Consider other types of loans to cover part of the cost
Reason #5: Not Enough Experience
Showing You Know What You’re Doing
Banks like to lend to people who have done this before. If you’re new, they might be worried.
How to Fix It:
- Start with smaller properties to gain experience
- Team up with someone who has more experience
- Show how your other business skills can help
Reason #6: Messy or Incomplete Paperwork
Getting Your Documents in Order
Banks hate messy or incomplete applications. They need to see all your information clearly.
How to Fix It:
- Make a list of all the documents you need
- Get help from a professional to prepare your papers
- Organize everything neatly with clear labels
Reason #7: Unrealistic Plans
Being Honest About Your Prospects
It’s good to be positive, but don’t overdo it. Banks don’t like plans that seem too good to be true.
How to Fix It:
- Use realistic numbers in your plans
- Use real data to support your ideas
- Show that you understand the risks
Reason #8: Worries About the Economy
Dealing with Things You Can’t Control
Sometimes banks say no because they’re worried about the economy or the local market.
How to Fix It:
- Choose properties in stable areas
- Show how your plan works even if things change
- Look for properties with different types of tenants
Reason #9: Problems with the Property
Making Sure the Property is Good
Banks look closely at the property itself. They care about its condition and location.
How to Fix It:
- Check the property carefully before applying for a loan
- Fix any big problems before asking for money
- Get a professional to say how much the property is worth
Reason #10: Choosing the Wrong Type of Loan
Finding the Right Fit
Not all loans are the same. Asking for the wrong type of loan can lead to rejection.
How to Fix It:
- Learn about different types of loans
- Talk to a mortgage broker for help
- Look for banks that know about your type of property
Tips for Success: How to Get Approved
Here are some general tips to help your application succeed:
1. Build Good Relationships with Banks
Get to know several banks. Having a good history with banks can help.
2. Improve Your Finances
Work on making your personal and business finances better before applying.
3. Invest in Different Types of Properties
Having different types of properties shows you can handle various situations.
4. Stay Up to Date
Learn about what’s happening in real estate. This knowledge will help you make better plans.
5. Look at Other Ways to Get Money
If banks keep saying no, look into other ways to get funding.
Conclusion: Don’t Give Up
Getting a commercial real estate loan can be tough. But now you know why banks say no and how to fix it. Use these tips to make your application stronger.
Remember, each “no” is a chance to learn. Keep trying and keep learning. Ask for help when you need it.
With good preparation and the right approach, you can get the loan you need. Keep working at it, and you’ll reach your real estate goals.
