Copious documentation is required for commercial mortgages
The commercial mortgage paper chase
- Lenders want to see tax returns, business-financial records and explanations for any negative financial information.
- For commercial properties that rely on tenant rents, be prepared to produce additional documents, including lease schedules and a background on the property manager.
- Government-backed loans often have unique documentation requirements, such as requiring records from past loan applications.
- It’s wise to contact lenders ahead of seeking a loan to get a handle on the specific paperwork required.
How long will it take to get my loan funded?
That's a primary question of borrowers seeking commercial mortgages, and the answer involves not only how long it takes for lenders to approve and fund a loan, but also the time necessary to gather up paperwork needed to complete the loan application.
For starters, borrowers typically must provide up-to-date tax returns — both business and personal — bank statements, personal financial statements and other applicable business documents, such as profit and loss statements and current business operating-expense records.
Lenders often require three to five years of such records so, in a sense, the application process starts long before borrowers even decide to seek a loan. As Jim Blasingame writes at Forbes.com, "too many small-business owners don't track financial performance well enough to know how they're really doing," and if they don't know, lenders won't either.
Tax returns as well as personal- and business-financial statements might do it for commercial mortgage-seekers with spotless credit and tax histories who are seeking relatively straightforward financing. Others will need to produce explanations of derogatory personal-credit reports, records of tax extensions and tax liens, and documents relating to any subordinate financing on the property.
Somewhere in the process, loan applicants must pay for an appraisal of the property and show proof of insurance. Beyond that, the type of documents required depends on the type of property that's being financed.
If it's an owner-occupied commercial building, lenders will want to see the appraisal and insurance documents, as well as the general personal and business financial statements, even if the property is held as a separate company, or is partly leased and only partly owner-occupied.
There's additional documentation required for financing properties in which rents are used to pay the mortgage, taxes and other expenses — a category that includes a variety of investment properties, such as offices, shopping centers and, of course, the entire spectrum of multifamily housing. For those properties, lenders will want to see current rent rolls or a schedule of leases.
Many lenders also want to make sure the property is competently managed during the term of the loan. If the owners double as managers, they'll need to provide resumes showing property-management background; if the property is managed professionally, prospective borrowers need to provide evidence of the management company's experience and credentials.
Fannie Mae, the government-sponsored enterprise that guarantees billions in multifamily housing loans has its own checklist of documents required from a borrower. They include what's known as Form 6401, in which the prospective borrower's attorney certifies that the property is located where the borrower says it is and that, to the best of the counsel's knowledge, the borrower has been truthful in other loan application documents.
A variety of government-backed loans have unique documentation requirements, in addition to the basic financial information.
Among the items required for the U.S. Small Business Administration's CDC/504 program, which guarantees commercial real estate financing, is proof of a business license (or a corporate seal) and records from past loan applications.
The U.S. Department of Agriculture program that guarantees some commercial loans in rural areas includes a request for environmental information, in which applicants list the land uses and environmental resources that would be affected by their project.
The quest to find and produce everything from routine business records to unique loan-specific documents can wear borrowers down during the loan-application process. To save time and get a jump on the paperwork process, it's a good idea to contact lenders, or visit their websites, in advance of seeking a loan to learn their documentation requirements.