Understanding the Types of Commercial Real Estate Loans

Couple with Realtor

Are you looking for your first real estate investment loan in Texas? If so, it’s important to understand how these commercial loans work. In most cases, these kinds of loans are used to purchase and/or renovate properties that are owner-occupied. Generally, these loans are for properties such as office buildings, retail centers, and mixed-use buildings. Keep reading to learn more about the 5 main types of commercial loans and how you can qualify.

SBA 7(a) Loan

This type of commercial loan is for the investor who wants to buy a commercial property for the long-haul. It’s an owner-occupied loan for commercial properties up to $5,000,000. Real estate lenders in Texas want applicants to meet the following qualifications:

  • In business for at least 2 years
  • Have a credit score of 680 or higher
  • 51% owner-occupied

The loan period for this type of loan is up to 25 years and funding is available between 60-90 days.

CDC / SBA 504 Loan

If you’re looking for a commercial loan with no maximum limit, this is a loan product for you. That is, as long as you meet the credit requirements of a 680 credit score and have at least 10% for a down payment. The loan terms for this loan are shorter with the average term falling between 10 – 20 years.

Traditional Mortgage

For people more comfortable with traditional loan terms, the traditional commercial mortgage is an attractive loan product. However, as with most traditional loans, credit requirements are strict. You must have excellent credit, with a score no less than 700. You also must have at least a 15% down payment. One of the benefits of a traditional mortgage is there’s no maximum limit, which is attractive for those investors looking for a good real estate investor loan.

Filling Out Forms

Commercial Bridge Loan

Not every investor is looking for lengthy loan terms. If you fall into this category, a commercial bridge loan is an excellent option. These are short term loans of 6 – 36 months. They also have the following requirements:

  • 700 or better credit score
  • A net worth equal to the loan amount
  • Have experience with 1-3 commercial investment projects
  • 10% down payment

This loan product is great for investors who want to get into a project quickly since funding occurs within 15 – 45 days.

Commercial Hard Money Loan

This is another short-term loan option that has lower credit score requirements and is a great way for people with bad credit to get real estate investment loans. Many people use hard money loans for renovation projects and when they need quick funding. The average funding period for hard money commercial loans is 10 -15 days. When applying for this type of loan, you’ll need a proof of down payment, experience with 1-3 commercial renovation projects, and a 10%-20% down payment.

Commercial loan products are not the same as traditional residential mortgage loans. For this reason, it’s important that investors understand the loan product completely before signing any papers and receiving any money. To find a commercial real estate loan in Texas for your next project, work with the best lenders. Contact Investor Loan Source today to learn more about the loan options available to you.

Debunking the Myths about Hard Money Loans

Money bags and house cutout on balance scale

Many people don’t understand how hard money loans in Houston work, especially when someone is first learning about them. There are a lot of misunderstandings about how these loans work and why you would want one. A lot of people automatically assume that they won’t qualify for these loans and that there are too many hoops to jump through to secure the financing. Continue reading to learn more about this type of loan product and discover the facts.

Myth #1 – These Loans Are a Scam

Any lender can be dishonest. It doesn’t matter whether it’s a lender who specializes in hard money loans in Texas or a traditional bank. People often associate hard money lending with desperation, because they require the property to have 30% to 50% of equity. The reason for the strict equity requirements isn’t a scam; it’s a safety measure for lenders. They want to make sure that, if the client defaults on the loan terms, they don’t lose all the money they invested. It’s an exit strategy, and all investors want a clearly defined exist strategy. That’s just good business.

Myth #2 – Hard Money Loans Are Expensive

All financial institutions that lend money have varying loan structures and required fees. Hard money lenders offer competitive products. So, if you’ve been told that a certain lender is too expensive, do your research. Look at several different lenders before settling on one.

This is good advice no matter what type of loan you need, because pricing isn’t set across the board. Some lenders may charge higher interest rates. Others may have pre-payment penalties or other requirements that affect the cost of the loan. Most people who claim their hard money agreement was too high say this as a direct result of not researching their options beforehand.

Businessman handing cash across desk

Myth #3 – Traditional Loans Aren’t as Risky

Any loan carries risk. So, why do people get spooked by hard money loans in Houston, TX? First, it’s likely that people aren’t doing their own research but listening to other people’s horror stories. Second, they aren’t taking into account that there are 2 sides to every story. Most people who’ve had a bad experience with an investor-focused loan product weren’t prepared when they took out the loan.

Traditional loans are great for people who want to buy a house and stay in it for 10, 20, or 30+ years. They aren’t ideal for investors who want to get into a house and flip it for a profit. Investor loans do have higher fees and rates. but only if the investor hangs onto the property too long.

The best way to use a hard money lending product is to have a solid plan for flipping the home quickly. People who know how to manage the money on projects like these find that it’s easy and affordable to take out a hard money loan.

First-time Investors

Are you a first-time investor interested in profiting from real estate transactions? Then it’s important to learn as much as you can about Houston, TX, hard money loans. Discover how these loan programs can help you achieve your real estate investment goals and grow your wealth. For more information about investment loans, contact Investor Loan Source today with all your questions.

Top Reasons Why Hard Money Loans Are Rejected

Buying a House

Hard money loans in Texas are considered to be one of the easiest kinds of loans to get. They are preferred among real estate investors because the application procedure doesn’t include things like income history or credit worthiness. Instead, lenders are more interested in the property’s value. That being the case, there are times when this type of loan might be denied. If you’re a real estate investor, keep reading to learn why your loan application could be denied.

Equity Concerns

Most hard money loans in Texas are not for the full amount of the property. Lenders aren’t keen on financing the entire purchase. These loans are only meant to help out with some of the investment costs. Investors often run into problems getting approval for this transaction when there isn’t enough equity in the property to borrow against. Most lenders want at least 25% equity to consider a loan application. If the property doesn’t have this much equity, then you’ll need to come up with a larger down payment to offset the difference.

Lack of an Exit Strategy

Private money lenders want to know your exit strategy. If you don’t have one, forget about nailing down hard money loans in Houston. Why is this strategy so important to lenders? Unlike conventional home loans, hard money lending products are designed to be short-term. Since these products are for the investor, they rarely offer loans beyond 1-3 years. At the end of the term, the remaining balance is due, which in many cases means a hefty payment. Lenders don’t want to be on the hook for 5 or 6-figure balances. Therefore, hard money lenders want to know what you’re going to do if you can’t pay off the balance at the end of the term.

Examples of common real estate investor exit strategies include the following:

  • Refinancing either with a new hard money loan or a conventional loan
  • Selling the property
  • Selling another property and using the proceeds to pay off the balance

Not Enough Money to Make Monthly Payments

While it’s true that credit scores, past foreclosures, and income history don’t matter as much when applying for hard money loans in Houston, TX, you still have to prove you can afford to make monthly payments. If your income falls short, lenders see this as indicator that you might not pay back the money. You can prevent a denial because of income shortfalls by proving with income statements and/or bank statements that you have the money to follow through with your financial obligation. Investors that don’t have substantial cash reserves often team up with more financially stable partners to avoid being denied.

Signing a Form

Are you ready to apply for one of these loans? Houston, TX, hard money loans are easier to obtain than going to your local bank branch for a conventional home loan. However, before you seek out one of these loans, make sure the investment property has enough equity and that you can make the monthly payments. Many investors find that future loans are even easier to get when they establish a relationship with their lender. Therefore, find a hard money lender whose terms you like and work to establish a relationship for future investments.

For great terms on hard money lending products, contact Investor Loan Source today!