There is such a thing called commercial mortgage—just so you know in case you only think about financing of a residential property when you hear the word, “mortgage.”

‘Commercial loan’ and ‘commercial mortgage’ are terms often used interchangeably to umbrella business financing options such as:

* Buying property where you will operate your business

* Buying property for the purpose of leasing it out

* Business startup financing

* Overdraft protection

* Lines of credit

Here, we’ll talk about commercial mortgages for the purpose of buying property.

Commercial Property

You normally talk about single-family houses, duplexes, townhouses, or condominiums, while discussing residential purchases.  ‘Commercial property’ describes a much more expansive property description, including:

* High-rise office buildings

* Apartment buildings

* Car washes

* Hospitals

* Retail shops

* Storage business

* Gas stations

* Movie theatres

Rather than simply a means of shelter, commercial property is actually used for the purpose of making money.  The qualification factors for a commercial mortgage are based largely on the earning potential of the property that’s why it is important to understand this fact.

The cost of the building versus the net income potential is one of first things the mortgage lender will want to know. They do this by calculating a Debt-Service Coverage Ratio (DSCR).

A basic DSCR equation looks like this:

Income –Expenses (net income) /Mortgage Amount (including interest)

The lender will look at this on an annual basis, to insure that the property can feasibly make more money than it costs to finance it.

As usual, the creditworthiness of the mortgage guarantor, which could be different from the borrower, will also be examined by the lender.  The guarantor may be an individual who has an interest in the company while the borrower is a company that operates as a corporation or limited liability partnership.

Just like what someone who is applying for a home mortgage does, the guarantor will go through a credit check.  This is similar to a business owner who ensures that his credit is free of any inaccuracies that may have a negative impact on his credit score.