Commercial Lender Mortgage Second | Why Most Commercial Lenders Refuse Second Mortgages
Commercial properties are high risk, high reward. They’re high risk because they are often a significant amount of money and are dependent on market factors to thrive. They’re high reward because they bring in more revenue than the cost of the property and are always in high demand.
For lenders, the same thing is true. Commercial lenders find that they are able to profit well of commercial properties because borrowers are committed to paying back the loan. But they’re high risk as well because the amount of the loan is significant, and if anything happens they could take substantial losses.
Commercial Lenders, Mortgages, and Second Mortgages
Lenders not only ask for but require several “proofs” that you’re a low risk. One of those is down payment. Lenders require at minimum a 25% down payment on the property valuation, and on properties of $500,000 or more, these down payments start at as much as $125,000 and go up from there.
For borrowers that are confident they’ve found a great property that can still be a substantial investment. But without that investment, commercial lenders will not provide you with a loan. So some borrowers try to have the seller “carry back” some portion of the purchase price – a form of second mortgage where the buyer essentially owes the seller instead of a lender, in order to reduce the LTV.
Unfortunately, this method will not work. Commercial lender mortgages do not let second sources of debt be used to cover the loan. That is because:
- Lenders need to know that they are the priority for receiving monthly payments.
- Lenders need to know that you’re invested – that your capital has been put into the property.
- Lenders need to know that you’re not going to use any of your other sources of money just to pay back loans.
In many cases, lenders also need to know that they have sole ownership over the property if you default on any of your loans, and in the event you own someone else, legal cases can become murky.
The Solution to Trouble With Down Payments
Rather than take out a second mortgage on the home using a seller carry back – or any form of investment – you should instead look for alternate sources of funding that aren’t directly connected to the property. For example, you are allowed to take out a second mortgage on a different property that you own, or see if you can find investors that will share some of the investment but also some of the burden.
Finding the Right Lender and Getting the Right Loan
If you’ve found an excellent property and you are interested in learning more about how to fund it or what the right rates are, make sure you sign up with CRE Lender today. Our company focuses on connecting you with lending sources and those with knowledge about lending that can walk you through the process and help you find the best rates for your property. Sign up today.
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