How To Avoid Surprise Costs During The Commercial Mortgage Process

As any business owner knows, surprise costs can have a serious impact in both your monthly balance sheets and your cash on hand. If you are applying for a commercial mortgage, it’s important to do all due diligence to assure that you know what to expect every step of the way.

Make sure you research all of these potential costs so that surprise expenses do not add unexpected financial strain that can threaten the stability of your growing business:

Loan Commissions

Commissions on commercial mortgages are typically higher than they are on personal loan. This is because businesses have a lot of moving parts and a lot of inherent uncertainty. While every business is different and it’s hard to make generalities, surveys show that only around one in five commercial loan applications ever close. This can be due to specific businesses’ changing plans or many other factors and those who are in a higher state of readiness have significantly higher chances of going through.

Shopping around can help you understand the prevailing rates and find the best deal to fit your business. We make this simple through our commercial mortgage loan platform.

Legal Fees

It is important that you understand all of the terms of a loan and everything that is required. The assistance of legal experts is invaluable in this respect. Adding this cost into what you expect means that you do not have to skip out on valuable counsel that can save you time and headaches later on.

Appraisal Charges

Commercial real estate appraisals are more complex than those for residential properties. With a house, the asset itself constitutes the main value. With commercial real estate, there are also factors such as expected rental rates and expenses paid out as part of ownership. While your lender is the one who will typically order an appraisal, this is a fee that may be passed on to the borrower.

It’s important not to hold back any information during an appraisal, as this can delay the process and lead to potential inaccuracies. Letting the appraiser know, for instance, what your interest in the property is will allow them to give them a better idea of what information is required.

For instance, you’ll get different information from what is known as fee simple interest, which is simply an appraisal of the property value versus leased fee interest, which details the income potential. Any commercial tenants of yours will also want information about the leasehold interest, which reveals what a property is worth to a tenant.

You’ll also want to plan for any time that the appraisal process adds to your timeline. Appraisals are a multi-step process that involve inspections, analysis and reports.

Survey Charges

A survey is separate from an appraisal. Your survey requirements will depend on the type of survey that is needed for the commercial property you are purchasing. A land use-zoning survey, for instance, will assess the current zoning on the parcel and what the land can be used for. Flood plain surveys detail issues with an area’s flood hazard. Mortgage and as-built surveys look at details that include property lines and structures on the property at the time of sale.

There are federal laws that address what must be included in each specific survey type. Your state may also have specific requirements when it comes to surveys, including what certifications a surveyor must have.

Mortgage Points

The advertised interest rate on a loan may not be the full interest rate a business will be charged each month. In many cases, there are also costs on top of the loan that are expressed as direct percentages. So, if there are two “points” on your loan above the interest rate, this is an extra two percent that you should budget for every month.

Changing Interest Rates

When you apply for a loan, you will see that there are both fixed and variable rate interest loans available. While each have their benefits, it is important to consider how the costs of each will affect your business over time. A variable rate loan, for instance, may go up over time if US interest rates increase. This can make higher costs every month, eating into your business’s gross profits. A fixed rate loan provides predictability, but may result in paying a higher than market rate if interest rates fall.

Study current market conditions and expected federal financial policy to make better decisions for your business over the long term. If you do not plan for either of these eventualities, the unexpected costs can throw off other calculations and put a strain on your business.

Early Repayment Fees – Prepayment Penalties

Look over loan documents carefully to see what happens if you decide to refinance and repay your mortgage early. While a refinance may be a money-saving option down the line, it may also come with fees and penalties that can reduce any potential savings or call for upfront costs during your refinance. Knowing what to expect can help you assure that you have the cash on-hand.

By assessing all of the possible costs, you can make sure that you have the funding available at every step for each possible eventuality. This leaves you with fuller coffers after your loan is in place, meaning that your business is more resilient during those vital transitional months. Over time, this added stability gives you an edge over the competition and means that, where others fail, your business will thrive and succeed.

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