Common Misconceptions
Rate is the most critical
aspect of a loan: False
Depending on your circumstances, other
factors are often more important: how
quickly the loan can close, the monthly
payment, length of term, amortization
schedule, reporting requirements,
covenants, or assumability of the loan.
Appraisal costs are the same
for commercial and residential
properties: False
Determining valuation for commercial
properties is more intricate, and therefore
more costly than for residential properties.
A lot more research is involved to find similar
commercial properties in a given market.
Recent sales are compared, as well as the
rental income potential. Proper valuation is
critical as property income and appreciation
potential are the biggest determinants of
value for any real estate investor.
Interest rates are the same
for commercial and residential
loans: False
Commercial loan interest rates tend to
be higher for a number of reasons. First,
commercial loans have greater inherent
risk. Second, government sponsored
agencies such as Fannie Mae and Freddie
Mac, which help to keep residential rates
low by buying loans, don’t exist for
the majority of commercial real estate.
Lastly, there are fewer lending options
for commercial borrowers, which results
in a less competitive marketplace.
A down payment isn’t
needed for a commercial
mortgage: False
Commercial lenders don’t typically lend
the full value of a property. Usually, the
maximum loan-to-value ratio (LTV) is
75%, meaning that they will only lend
75% of the property’s value. So for a
$300,000 property, you could borrow
$225,000 with a $75,000 down payment.
Some lenders with more flexible programs
will offer higher LTVs to their most
creditworthy borrowers.
Appraised value is
always used to calculate
loan-to-value (LTV): False
For a purchase loan, both the purchase
price and the appraised value are examined.
The lower of the two is typically used to
determine the loan amount. For a refinance
or cash-out refinance, appraised value
is used.
I won’t be able to get a loan
if I’m self-employed: False
If you can provide documents to support
your income and assets, you can qualify
for a conventional loan program. If you
cannot or choose not to supply tax returns
or other documentation, you may qualify
for a No Income Verification/Limited
Documentation Loan Program (some
lenders call these types of loans Stated
Income/Stated Asset Loans). This program,
offered by some lenders, makes getting a
loan easier and faster, especially if you own
a predominately cash-based business.
I won’t be able to get a
loan if I was declined by
my bank: False
Some lenders use broader guidelines than
banks, and can approve loans that banks
turn down or aren’t comfortable with. Today
there are a lot of options for borrowers who
cannot obtain conventional financing.
I must live in the same
state where the property
is located: False
Many lenders, especially banks, won’t
lend money if you and the property are in
different states or if you or the property
are outside of the bank’s regional footprint.
However, a few national lenders will lend
to out-of-state borrowers.
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