Commercial Mortgages with Bad Credit

Commercial mortgages with bad credit  are reduced to only a few options.  Often borrowers find themselves in tough positions as many traditional and nontraditional banks will not even consider their mortgage if their score is below a 640. 

Commercial mortgages for borrowers with bad credit are, in general limited to 3 options – SBA commercial loans, commercial hard money and “story” lenders.

SBA commercial loans carry a lot of misperception, one of them is that the borrowers credit has to be in the mid to high 600’s and that this is dictated by the SBA.   The reality is that the SBA has no minimum with credit, it’s the funding banks that actually set this standard.  For example we work with a bank out of New Jersey that will often fund SBA commercial loans with borrowers credit score in the low 500’s.

Commercial hard money is probable the first thought for many when considering a commercial loan for a borrower with bad credit.   Most hard money commercial lenders are interested in the properties equity and or its cash flow and the borrower’s credit score is often just an afterthought.  Commercial Hard money lenders want to see at least 40% equity in the property or a 60% loan to value in order for them to seriously consider funding the deal.  Speed and flexibility with underwriting are the highlights of commercial hard money.  The expense is the downside.  Borrowers should expect to pay 3-6% points and have a rate around 13-16%.

“Story lenders” are banks that are willing to listen to the borrower’s story about their difficult situation.  They are often willing to overlook many difficult situations such as bad credit, weak business cash flow, high loan to values, etc.  Although there are few banks that would describe themselves as a story lender the borrower should look locally or work with professionals in the business that may know of a few banks that can get over their difficulties. 

For example, we recently closed a loan that was in foreclosure by refinancing it with another bank that was more willing to listen to the borrower than their existing bank.  Their situation was that their loan had ballooned and despite their best efforts they could not get their existing bank to refinance the loan or find another bank that would either.  After a year of searching they couldn’t get it done and their existing bank put more pressure on them by calling the “note” (forced foreclosure).  We knew of a bank out of California that would be interested, provided the borrower refinance some of their unsecured business loans into the proposed loan to improve the borrowers over all cash flow.

So, borrowers with bad credit commercial loans should be prepared  for some “brain damage” as they will have to find a viable source after hearing many “no’s”.  

Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan.  He has a STORE for commercial loan brokers.  Contracts, spreadsheets, books, etc.  Products starting at $4.95!  Check it out  commercial mortgage brokers