Aug 4, 2022
People often opt for small but completely functional real estate instead of high-end class A buildings because it’s a profitable option business-wise. They can use the capital for other business purposes and the growth of the organization.
One thing that makes the purchase difficult for people is finding a commercial loan to finance these smaller-size purchases. It’s because traditional lenders overlook smaller loans and favor higher-balance transactions. As a result, people are unable to upgrade their choice and face the risk of not qualifying for a mortgage.
Traditionally, this limitation broke the dreams of many people and organizations. But, today, people are fulfilling the dream of buying small real estate and saving their capital significantly, with the help of small-balance commercial loans. The small-balance commercial loan program fills the gap in traditional lending, providing an opportunity to all potential borrowers.
As the loan program is designed to fund smaller commercial real estate transactions, the borrowers qualify for purchase or refinance loans that amount from $200,000 to $500,000 to a maximum loan amount of $2.5 - $5 million. The amount depends on the lender, program, and the credit worthiness of the borrowers. In some cases, the amount might go higher than mentioned above.
The small-balance commercial loans are more flexible and come with less rigorous underwriting requirements. The approval process is simple and streamlined, with a variety of programs. The programs introduced under the small-balance commercial loans are designed to overcome the limitations faced by most borrowers. In many cases, these limitations keep the borrowers deprived of mortgage loans and fulfilling their dreams.
The programs options designed for the borrowers to overcome all the limitations of traditional lending are:
When borrowers cannot submit significant financial documents because of various reasons, the Less Doc program is for them. This option is ideal for self-employed borrowers or real estate investors whose tax returns don’t reflect adequate income. Other than this, the foreign nationals who don’t wish to disclose their cash flow information prefer this option.
To qualify for Lesser Doc loans, the small-balance commercial lenders are for relatively higher credit scores, minimum of 700. And it’s because the risk for lenders is very high, lenders generally rely on the third-party consumer credit report and offer a maximum loan-to-value of 75% to lower the small-balance loan’s risk.
Here, the small-balance commercial lenders ask for bank statements instead of tax returns. This is why it is known as the variation of the Bank Statement Loan program. This program is ideal for business owners who don’t report sufficient income for tax reasons but have bank statements, proving their ability to repay.
In this program, the borrowers are asked to submit bank statements from the past 12 to 24 months and other documents that include debt, capital expenditures, and deferred maintenance.
The small-balance commercial lenders assess the loan application based on these documents and decide if the transactions show sufficient income for repayment.
Compared to the two programs discussed above, this program requires more documents. But, under this program, the lenders don’t ask buyers to submit tax returns like in most traditional loans. Non-submission of tax returns benefits many business owners.
The small-balance commercial lenders ask for documents based on the property to be financed and the borrowers’ unique situation. Some of the common documents are operating statements, rent rolls, and other schedules, including debt, capital expenditure, and deferred maintenance. Lenders even offer flexible requirements depending on the borrower’s preference.
The loan approval process under this program speeds up after the submission of a CPA letter. It’s a document typically asked by the lenders to verify the borrower's self-employment status and business income.
If the borrowers have all the documents and they don’t have any problem showing them, full documentation or the Full Doc program is an ideal option for them. The best thing about full documentation for a loan is that it comes with good terms and interest rates. And it’s because lenders face lower risk after the submission of all the documents. They can evaluate the borrowers’ repayment ability after assessing all the documents.
Some of the important documents required to qualify for this program are two years of personal and business tax returns, operating statements, profit and loss statements, personal financial statements, and purchase contracts if applicable.
The loan amount varies with the program and the document submitted by you to the small-balance commercial lenders. So, you should check your requirements before choosing the program type. And most importantly, you should determine your capability to submit the documents for the loan programs.
With a full documentation program, you will enjoy the best loan offers. Chances are that all your financing issues for purchasing small real estate will get over with this. On the other hand, you don’t have to worry about documents in the other three options but the amount, terms, and interest rates will not be as expected because of the higher risk for lenders. If your lender is flexible about document submission, you should opt for the program that offers the maximum loan amount with easy terms and conditions.
The process to choose one from these programs is very overwhelming. Without proper knowledge, you might end up choosing the wrong option and suffer for the rest of your life. So, it’s good to seek help from professionals. They will help you choose the right option and complete the loan application process because they are experienced. Meanwhile, you can focus on other important things related to your business.
If are ready to apply for small-balance commercial loans but have lots of questions regarding the same, contact Royale Capital. We will answer all your queries and help you complete the loan application process.