It’s always best to solve problems before they become problems. Nowhere is this more true than in the lending business. We see far too many borrowers get into trouble because they overextend themselves – or, ironically, find themselves struggling to keep up with high mortgage payments because their down payment was inadequate. Here’s some tips on how to educate borrowers on commercial loan down payments.
Make Sure The Borrower Understands The Risk
Commercial loans are by nature risky – after all, there is no guarantee that a business will be successful. Restaurants are the obvious example. Over half of all new restaurants fail within the first year, and those numbers actually increase as time goes on, with an estimated 80% failure rate within the first five years.
Before any discussion of a commercial loan down payment happens, borrowers need to understand the risks, and be prepared to show that they have a sound business plan in place. What are their cash flow needs? Will they be able to cover their operating expenses along with payments on the commercial property loan? Do they understand the repayment terms?
Make Sure The Borrower Understands How Commercial Loan Down Payments Work
Borrowers who are looking to secure their first commercial real estate loan may not fully understand how a commercial loan differs from a residential loan. It’s important that the role of the loan-to-value comparison is made clear; that will determine how much the down payment should be. Borrowers who are unfamiliar with LTV may be surprised to discover that the down payment will be higher than what they had in mind – sometimes substantially so. Being asked for 35% or more of the property’s fair market value may come as a shock to the uninformed.
Help The Borrower Explore Their Options
For those who can’t afford a high down payment, there may be options. Notably, SBA loans offer lower down payments; the SBA 504 may allow borrowers to put down as little as 10%. But the borrower must keep in mind that they’re on the hook for the remaining 90%, and that their payments will reflect the larger amount borrowed.
Advising lenders on how to help borrowers understand commercial loan down payments comes naturally to us. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.
