How to Get a CRE Loan with a Low Credit Score
There are a number of reasons why someone might want to obtain a commercial real estate (CRE) loan. Take, for example, an investor who has thus far only worked in the residential market and is looking to push into the commercial territory. Or, perhaps an individual who is looking to establish a new business and needs a retail storefront or commercial office space to work from. One of the first things most people will look for in these or similar circumstances is financing, and for those who are saddled with a low credit score or cash flow issues, the task can be daunting to say the least.
Let’s face it: credit matters. But just because your score may not be 100% up to snuff doesn’t mean you’re completely shut out of ever obtaining a CRE loan. Here’s what to keep in mind during your search for the right lender, all of which should help bring a sense of clarity to the process.
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Individual Loans vs. Business Entity Loans
When many people first set out to get a commercial real estate loan, they tend to make the relatively common mistake of believing the loan will be put into their own name if acquired. This is not the case, however. Unlike residential mortgages that are given out to individuals, CRE loans are granted to business entities – corporations, trusts, non-profits or the like.
In some cases, business entities are created with the sole purpose of purchasing commercial real estate, although entities that have been established for many years may choose to apply for a loan should a need arise.
An Entity’s Financial Track Record
One of the reasons why a business entity might have a relatively low credit score is because it hasn’t had the chance to actually establish much (if any) credit yet. This can be due to the business being relatively new or, in the case that credit-yielding transactions, that they simply haven’t been a focus of the entity thus far.
Regardless of why a low score may exist, traditional lenders will most certainly require a bit more from the borrower as opposed to working with entities that have strong financial track records. One common demand of traditional lenders is the requirement of a personal guarantee of an entity’s owner or owners, thus providing assurance of an individual’s credit score in the case of default. Needless to say, however, most people are uncomfortable providing a personal guarantee.
If both an entity and its owner suffer from low credit scores, there is one other method of obtaining CRE loans—working with a non-recourse private lender. While banks tend to look very carefully at credit scores before ever issuing a loan, private non-recourse lenders tend to be more concerned with the value of the property to use as recovery if the borrower defaults. As a result, non-recourse loans take the individual and entity out of the equation in the case that a difficult situation arises, leaving the property as the only form of recourse for the lender.
So don’t just assume a low credit score means never being able to break into the commercial real estate market. There are a number of private CRE lenders to choose from, many of which can help turn dreams into reality for individuals and entities that lack good credit. Take the right steps, and a CRE loan can be yours before you know it.