A business owner looking to purchase a commercial space faces a monumental task ahead. While buying a space is the ultimate goal, it’s the financial aspect of it that also needs to be addressed. This includes applying for a commercial mortgage and getting approved. The process is significantly more complex and differs substantially from that of individuals applying for residential mortgages. Yet, we will help you navigate the process much more easily in this guide.
Specifically, we will review the documents you will need to obtain during the commercial mortgage application process. You must review this guide thoroughly to ensure you do not skip any steps. One missing document you forgot to submit can throw things off. Let’s get right to it and discuss why documentation is vital for the application process for commercial mortgages.
Why Is Documentation Important For Commercial Mortgage Applications?
A commercial mortgage in West Chester, PA will require necessary documentation for the application process. Lenders need to know if your business will be able to repay the loan, albeit in the long term. Commercial loan underwriters will need to ensure that the financial health of both you (the borrower) and the business is satisfactory. They also need to know the revenue potential of the company itself.
Lenders specializing in commercial loans will need to assess various aspects of your business. This includes your cash flow, industry viability, creditworthiness, and asset value. You will need to submit each document to ensure that everything is in good standing, which will help you secure a commercial loan.
Mortgage Application Checklist: What You Need
This mortgage application checklist will help you navigate through the process of securing a commercial mortgage in West Chester, PA. Ensure you have all necessary documents and materials on hand before submitting any applications. We also want to remind you that the documentation requirements vary from one lender to another. It is still essential to ensure you have the recommended materials listed below, as better preparation will set you apart from other applications. Here’s what you’ll want to have with you:
Personal and Business Identification
The first part of the checklist focuses on confirming your identity and the legal standing of your business. This includes the following:
- Driver’s license or passport (applies to all business owners with a stake of 20% ownership or higher)
- Articles of incorporation or documents specifying the formation of your business
- Business license or operating permit
- Employer Identification Number (EIN)
- A chart that outlines your organizational structure
The documents listed above serve as confirmation that your business is in good standing. It will also determine who has the authority to act on business decisions. This includes deciding who the decision-maker is for selecting which mortgages to apply for. If you hold the final decision-making power, you must be sure to discuss the mortgage you intend to choose with your business partners.
Business Financial Statements
The importance of financial health for commercial mortgage loans is critical. That is why lenders will require you to provide them with financial records of your business from the previous 2 to 3 years. The documents required will need to include the following:
- Profit and loss statements (P&L)
- Balance sheets
- Cash flow statements
- Reports of accounts receivable and accounts payable
Lenders will use this set of documentation for trend analysis. They will thoroughly look through revenue, expenses, and cash flow. These will be determining factors that will allow you to determine if your business can make consistent, regular mortgage payments promptly.
Tax Returns
These will include both your personal and business tax returns. Like the business financial statements, it is required that you provide such documentation from the previous 2 to 3 years. These include:
- Business tax returns (IRS Form 1120, 1120S, or 1065 – whichever is fitting for your business structure)
- Personal tax returns (1040) for business owners who own significant shares of the business
The purpose of these documents is to provide lenders with an understanding of your long-term financial stability. It will also help them validate the numbers regarding other financial statements that have been provided.
Business Plan and Executive Summary
Although it is not mandatory to include this, it may help secure a commercial mortgage. Consider adding this as one of your business loan documents in West Chester, PA. The document should have the following details:
- Business overview and mission
- Market analysis and competition
- Growth strategy and use of funds
- Revenue model and projections
- Management background
The business plan will provide lenders with an understanding of how the commercial property you wish to purchase aligns with your broader strategy. It will also provide them with a much deeper understanding of how you intend to generate additional revenue. A lender can have more confidence in an applicant if they have a deep, detailed knowledge of how a borrower will generate extra revenue.
Credit Reports
These documents are just as critical as other financial documents you will provide. The lender will pull credit reports for your business and each principal owner. What they look for is a strong credit profile that confirms their reliability. If the credit report indicates any cause for concern, lenders may request additional collateral or a higher down payment as a precaution. Otherwise, the application is rejected altogether.
Property Information and Appraisal
The property is considered collateral. Which means that the value and condition will be critical in getting approved. That’s why such items will need to be considered, like:
- A purchase contract (if necessary)
- Lease agreements (assuming you have tenants or plan on having them)
- Current property appraisal
- Property condition assessment
- Environmental reports (Phase I or Phase II)
Please note that the original closing documents and title information are both required if the loan is intended for refinancing. This will increase your chances of getting approved.
Debt Schedule and Existing Liabilities
Your current financial obligations should also be made aware to lenders. This includes:
- Schedule of both your current personal and business debts.
- UCC filings or lien documentation (including loan statements you might have for existing mortgages, lines of credit, or equipment leases.
This helps calculate your debt-service coverage ratio (DSCR), a critical metric for commercial loan underwriters to use.
Personal Financial Statement
Each business owner procures a personal financial statement. It will include information like:
- Assets and liabilities
- Monthly income and expenses
- Documentation of any residential and investment properties that they might own.
It will indicate that the borrower has the option to personally guarantee the loan if the business is unable to repay it. If the business cannot pay it out of its account, the responsibility will fall on you to use your personal bank account for payments.
Entity Documentation and Operating Agreements
Depending on the structure of your business (e.g., LLC, Corporation, Partnership), you will want to provide documentation that indicates its structure. These include:
- Operating and partnership agreements
- Corporate bylaws
- Borrowing resolutions (signed by appropriate parties)
- Meeting minutes that authorize the mortgage transaction
Proof of Insurance
Lenders require the property to be insured at the time of purchase. The following documents will be needed:
- Proof of general liability insurance
- Property insurance policy
- Flood insurance (if applicable)
- Additional insurance coverage, depending on the property type
Insurance coverage protects your investment, as well as the collateral you have provided to your lender. It will also give lenders peace of mind that you have legal protections in place in the event of an incident at your business premises.
Work With A Mortgage Planner To Secure Your Commercial Loan
If you are considering securing a commercial mortgage, it begins with working with a professional who can help you navigate the obstacles. To increase your chances of approval, ensure you have the documents listed above. A mortgage planner who is familiar with commercial loans will be your best friend throughout the process. For more information on what to do next, please contact Penn Street Mortgage, and we will be happy to assist you.