Borrowers of commercial mortgage loans often ask about ways on how they can determine the interest rates of the loans they are applying for. For your information, there are actually many factors that are commonly considered by lending companies when determining interest rates. You should also know that the relative risk is commonly determined after the lender reviewed the loan application. In most cases, the lower the risk seen on an application, the lower the interest rate is incurred. Understandably, the interest rates become higher when the risk found by the lender is higher.
The following are factors every borrower should understand – factors that prove to be very significant to underwriters and lenders:
The Qualifications of the Borrower
The qualification of a borrower is one of the deciding factors for his loan application. Before a commercial mortgage loan is granted, the lender will conduct a thorough review and analysis of the borrower’s net worth, cash flow, liquidity, credit history, etc. The borrower should also have a good real estate experience or a good history in managing or owning similar properties. Lenders also want to see a good amount of cash reserves so that they can be used when unexpected problems arise. In addition, lenders also want to see applicants with a good track record on timely payments of bills.
Location of Property & Market
Properties that are commonly considered as lower risk are those that are found in suburban areas, cities and metropolis. On the other hand, properties are often considered to be inferior when they are located in tiny rural areas. Lenders are aware of the fact that properties in metropolitan areas and in the cities are more accessible and can easily get tenants should the former tenants decide to leave. For an instance, if a rural property becomes vacant, it will take a huge amount of time, money and effort to renovate it so as to attract and persuade new tenants.
Condition of the Property
Another way by which a borrower can get lower interest rates is to present his property in good condition with less deferred maintenance. If a property is shown to the lender this way, no major improvements shall be made. In the contrary, a property with poor condition requires a lender to escrow or set aside funds for the repair and maintenance of the property in question. Evidently, lenders are ware that properties with poor conditions perform worse when compared to well-maintained properties.
When opting for a commercial mortgage loan, it is important to take note of the importance of Loan-to-Value (LTV) especially in pointing out risk. A fifty percent LTV loan is much better than an eighty percent LTV loan. When a property tends to experience difficulty, there is more room for mistakes that have something to do with low leverage loans.