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4 Commercial Property Loans for Borrowers With Bad Credit
Has your credit score taken a hit? That doesn’t mean there aren’t options for your next commercial real estate acquisition, development, or refinance.
If you’re planning to invest in commercial real estate, you’ll likely need financing. And if you don’t have perfect credit, you may be a bit hesitant or unsure of where to begin.
Bad credit can make your search for a loan — as well as the loan approval process — stressful and tiring, for sure, but don’t worry. Sure, you may not qualify for a high-LTV non-recourse loan, but there are still plenty of options available for commercial real estate investors.
This article highlights four commercial property loans with bad credit, along with the pros and cons of each.
Types of Loans for Borrowers With Poor Credit
There are several types of loans available for borrowers with bad credit. Each has its own benefits and drawbacks, so it's important to compare your options before choosing one. We’ve outlined four loan types below that you may be able to get approved for, regardless of your credit score.
Traditional Bank Financing
A bank loan is many investors’ first thought when it comes to getting a loan for a commercial property. And for good reason — bank loans are among the most commonly utilized financing instruments for commercial real estate, regardless of a borrower’s credit.
Will a bank extend financing to someone with bad credit? Many will not; it’s true.
But here’s where the sheer number of banks and credit unions gives you a serious advantage. Because there are just so many niche bank lenders with so many different requirements and levels of risk tolerance, bad credit isn’t necessarily a dealbreaker. Shopping your loan around could get you some surprising results.
One of the benefits of traditional bank financing is that it's typically easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. On the other hand, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years.
CMBS Loans
A CMBS loan is a type of commercial real estate loan that is securitized and sold to investors on the secondary market. CMBS lenders pool together different mortgages and then securitize them into bonds. The bonds are then sold to investors, who receive periodic payments from borrowers.
These loans are attractive to lenders because they have a more predictable repayment schedule than traditional loans. Lenders tend not to scrutinize borrowers too closely, instead prioritizing the asset and its cash flows in making a decision.
CMBS loans can be a good option for borrowers with bad credit. They offer more flexibility, lower interest rates, and do not require a personal guarantee. However, they are not available in all areas and may have higher fees than traditional loans. Borrowers should make sure to read the fine print and understand all fees before signing a loan agreement.
Hard Money Loans
Hard money loans are a type of loan backed by collateral rather than your credit score. Similar to how CMBS loans work, this financing type prioritizes the property’s value and financials far more than a borrower’s creditworthiness.
One of the benefits of hard money loans is that they can be easier to get approved for than traditional bank loans. They also offer significantly more flexibility, and many lenders may be willing to waive certain fees or work with a borrower to restructure a repayment schedule.
That said, hard money loans are expensive. The convenience comes at a price: Expect significantly higher interest rates and origination fees. Also, while hard money financing offers flexibility, this generally does not extend to the loan’s term. Many hard money loans are used as bridge financing, with most loans’ terms ranging up to around two years.
Private Money Loans
Private money loans are another option for borrowers with bad credit. This type of financing comes from, as you’d expect, private lenders. These lenders are broadly far less limited by regulations or bureaucracy. In many respects, they are similar to hard money loans.
The main advantage of a private money loan is that it is based on the asset’s financial strength — not yours. Approvals are generally rather speedy, too. They also rarely have prepayment penalties, so once you’re able to lock in longer-term financing, you can do so right away.
The main drawback is in terms of debt service costs. Private money loans have relatively high interest rates, and this could make monthly payments rather expensive. They also often require significant down payments — you may not be able to get your loan at a loan-to-value ratio of above 65%. Finally, while loan terms may be extendable, this often comes with an extension fee, adding to your overall debt cost.
In Conclusion
Bad credit can make it difficult to get approved for a loan, but there are still some options available. Traditional bank financing, CMBS loans, hard money loans, and private money loans are all options that you may be able to get approved for, even with bad credit.
That said, they do come with costs, from higher interest rates to shorter terms. Even if you have a solid investment strategy for your commercial real estate, finding a loan with less-than-ideal credit can be a daunting task. We can help you with that — fill in your details in the form below, and we’ll get to work.
Related Questions
What are the best commercial property loans for borrowers with bad credit?
The best commercial property loans for borrowers with bad credit are traditional bank financing, CMBS loans, hard money loans, and private money loans. Traditional bank financing may be easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. However, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years. CMBS loans are typically more difficult to get approved for than traditional bank financing, but they offer longer terms and lower interest rates. Hard money loans are typically easier to get approved for than CMBS loans, but they come with higher interest rates and shorter terms. Private money loans are typically the easiest to get approved for, but they come with the highest interest rates and shortest terms.
For more information, please see 4 Commercial Property Loans for Borrowers With Bad Credit.
What are the requirements for obtaining a commercial property loan with bad credit?
The requirements for obtaining a commercial property loan with bad credit vary depending on the lender. Generally, lenders will look at your credit score, debt-to-income ratio, and the amount of equity you have in the property. Additionally, lenders may require a down payment, proof of income, and other financial documents.
For more information, you can check out our blog post 4 Commercial Property Loans for Borrowers With Bad Credit.
What are the advantages and disadvantages of taking out a commercial property loan with bad credit?
The advantages of taking out a commercial property loan with bad credit are that it is typically easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. On the other hand, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years.
For more information, please see 4 Commercial Property Loans for Borrowers With Bad Credit.
What are the different types of commercial property loans available to borrowers with bad credit?
There are several types of loans available for borrowers with bad credit. These include traditional bank financing, hard money loans, seller financing, and private money loans. Each has its own benefits and drawbacks, so it's important to compare your options before choosing one.
Traditional bank financing is typically easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. On the other hand, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years.
Hard money loans are short-term loans secured by real estate. They are typically used by investors to purchase and renovate a property. Interest rates are usually higher than traditional bank loans, and the terms are usually shorter, ranging from 6 months to 3 years. However, they are easier to qualify for than traditional bank loans.
Seller financing is when the seller of the property provides the financing for the purchase. This can be a great option for borrowers with bad credit, as the seller may be more willing to overlook a low credit score. However, the terms of the loan may be less favorable than those of a traditional bank loan.
Private money loans are loans provided by private investors, such as family members or friends. These loans can be easier to qualify for than traditional bank loans, but the terms may be less favorable. Interest rates can be higher, and the terms may be shorter.
What are the risks associated with taking out a commercial property loan with bad credit?
The risks associated with taking out a commercial property loan with bad credit include higher interest rates and shorter terms. Banks may not extend financing to someone with bad credit, but there are still some options available. Traditional bank financing, CMBS loans, hard money loans, and private money loans are all options that you may be able to get approved for, even with bad credit. These loans come with costs, from higher interest rates to shorter terms. It is important to shop around for the right lender to get the best terms and rates.
For more information, please see 4 Commercial Property Loans for Borrowers With Bad Credit and Top Ten Commercial Real Estate Lenders 2021.
What are the best strategies for obtaining a commercial property loan with bad credit?
The best strategies for obtaining a commercial property loan with bad credit are to shop around for a lender that is willing to work with you, and to consider traditional bank financing, CMBS loans, hard money loans, and private money loans.
Traditional bank financing may be easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. On the other hand, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years.
CMBS loans are a type of commercial mortgage-backed security loan that is backed by a pool of commercial mortgages. These loans are typically more difficult to get approved for than traditional bank loans, but they can offer more competitive interest rates and longer terms.
Hard money loans are short-term loans that are backed by the value of the property, rather than the borrower’s credit. These loans are typically more expensive than traditional bank loans, but they can be easier to get approved for.
Private money loans are loans that are funded by private investors, rather than banks or other financial institutions. These loans can be more expensive than traditional bank loans, but they can also be easier to get approved for.
For more information, please see 4 Commercial Property Loans for Borrowers With Bad Credit.