Credit and Commercial Real Estate Finance

There are great programs for Real Estate Investors to purchase Commercial Real Estate especially apartment buildings and mixed use residential and commercial properties. But I get a lot of people with poor credit, no money for down payment and no ownership experience asking to borrow hundreds of thousands of dollars or even millions of dollars bringing nothing to the table.

So first of all you can purchase commercial real estate with less than perfect credit. To do so you will have a significantly higher down payment, significantly higher interest rate and significantly higher closing costs. If you qualify for agency financing you can have 30 year amortized fixed rate financing below 5 – 6%. (The rates change regularly and this information is not about quoting today’s rates but making a point about credit and qualifying for commercial real estate financing.) The credit score should be above 680 but there is a little flexibility. Conversely, you can have less than perfect credit qualify for interest rates from 8% to as high as 16% or more. The portfolio programs are generally amortized over 20 to 25 years (like most bank financing) with a five year balloon. The hard money loans are generally interest only.

Therefore there is a significant cost for poor credit even if you can get financed at all. For example a $1,000,000 mortgage at 5% amortized over 30 years has a payment of $5,368 per month. The same $1,000,000 mortgage amortized over 20 years at 9% interest is $8,997. At 14% interest only the payment would be $11,667. The cost of poor credit could be as low as $3,629 per month or as high as $6,299 per month or more based on this example. That is over $75,000 per year in interest that would go in your pocket if you have good credit or work with a reputable credit restoration company to legally restore and improve your credit score.

When we look at the cost of credit and some clients unwillingness to address this issue it makes me wonder if they are the business minded people that will be successful owning commercial real estate and repaying the loan. I am pro customer. I want every customer to meet their financial goals and get the financing they desire to do so. But, I understand lenders who do not want to risk their money when the borrower has less than perfect credit and or is unwilling to restore their profile and improve their score.

So when a borrower is working with a reputable legal credit restoration service to improve their credit score not only will they save money monthly, but the savings in down payment and closing costs will be well worth the effort. For an agency mortgage of $1,000,000.00 the down payment on residential or mixed use property can be as low as 15%. Most portfolio programs require a minimum of 25% to 30% down and hard money financing may not finance any more than 50% to 60% of the purchase price.

So the message is clear. To be a commercial real estate investor you should do whatever you can to improve and maintain a good credit score. Even if you own property now and are paying a higher interest rate make sure you work on your credit profile. Often its more than just paying your bills on time. The way you pay your bills accounts approximately 35% of your FICO Score. That means that 65% of your score has nothing to do with how you pay. If you can not improve the score on your own seek professional help from a reputable legal credit restoration company. It will save thousands if not hundreds of thousands of dollars.

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