How to Get a Commercial Loan in California

Real Estate Loan: How to Get a Commercial Loan in California?

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Last year, the index of commercial property prices reached 207.61 points, double since 2010. Rising interest rates, increased housing demand, the economy, and various other factors have contributed to the rise of this cost over the years.

Construction costs for a particular project depend on several factors, such as land, size, value, and location. In a busy place like California, material and labor costs drive the prices, which have increased to approximately 25% in the past decade. Real estate loans become necessary because of high construction costs.

To understand how to get a commercial loan in California, you must know how it helps and what factors affect its approval.

Real Estate Loans in California

According to the California Credit Union (CCU), you can access up to $15 million in commercial loans. A standard residential mortgage assists in buying or constructing a residential property, but a commercial real estate loan finances commercial property projects. Get help with:

  • Buying a commercial property
  • Constructing a commercial building
  • Renovating a commercial building
  • Refinancing a commercial property at a lower interest rate

Factors that Determine a Real Estate Loan Approval

Applying for a commercial loan is easy. The problem occurs when the lender rejects your application. But why would they do such a thing?

 

Factors that Determine a Real Estate Loan Approval

The Size of Property Occupancy

Your property must have a minimum of 51% business occupancy to qualify you for the loan. If not, opt for an investment loan, ideal for rental properties with less than 51% occupancy.

Personal Finances

The lender will also check your finances if you manage your company yourself. Do you have a good credit score and a consistent income source? You are low-risk, and the lender may accept your commercial loan. However, if your financial situation is unstable, the bank may reject your application because they cannot ascertain your ability to repay the loan.

Business Finances:

Did you know most small American businesses fail because of cash flow problems? Poor sales, property damage, or lawsuits are typically responsible. So, most lenders seek small business finances before approving a commercial loan. The lender will evaluate your debt service coverage ratio (DSCR) by dividing the property’s annual net operating income (NOI) by the annual debt payment. This ratio signifies whether your business is profitable or facing losses, establishing whether you can repay the loan. Apart from this, the lender will also consider your business credit score to discern your creditworthiness.

Where to Get Commercial Loans in California

 

Where to Get Commercial Loans in California

Banks:

Get a commercial loan from a reputable bank at an affordable interest rate. Most banks offer up to $1 million to small businesses. However, the application process is strict, detailed, and slow with increased banking regulations.

Commercial Lenders:

If you want your loan faster, choosing a commercial mortgage broker can help because their underwriting measures are less rigid. Although you can have your loan within a few weeks, you will pay higher interest rates.

SBA Loans:

SBA or Small Business Administration does not finance small businesses directly. They are instead partnered with lenders and set regulations on business loans to streamline access by small businesses. It reduces the risk for lenders if the borrower defaults on the loan since the SBA will repay the lender up to 85% of the loan balance. Since SBA loans are of a variety, choose what suits your business.

Additional Loan Application Requirements

  • Company certification
  • Tax return of up to 5 years
  • Proof of citizenship
  • A business plan showing how you will use the loan
  • Projected cash flow throughout the loan term
  • Business records
  • A third-party appraisal

The lender will also offer other repayment terms, such as a grace period during which your loan won’t accrue interest, but it will depend on the loan amount and repayment method.

We hope our blog can help you understand the factors needed to get a commercial real estate loan for your property renovation, construction, or refinancing in California. For more queries and information, consult our expert.

Can You Buy a Foreclosure With an FHA Loan?

Can You Buy a Foreclosure With an FHA Loan?

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Federal Housing Administration loans, or FHA loans, are backed by the government and made available to potential homebuyers with little or non-existent cash reserves or credit score limitations.

Foreclosures, not just homes sold by their owners, deserve your attention when you search for a property for sale. After all, FHA loans offered by our FHA Mortgage Brokers allow homebuyers to purchase properties in this category. This may allow you to locate the perfect house while paying a relatively affordable mortgage amount.

With the changes introduced to FHA loans recently, now might be the best time for you to consider obtaining one. Take the time needed to learn more about the ways FHA loans help you acquire a home easily.

FHA Loans for Financing Foreclosures

FHA Loans for Financing Foreclosures

You may wonder whether an FHA loan will allow you to finance a foreclosure. Well, the truth is that it can! You should be able to use such a loan to buy a property after it has been foreclosed. A foreclosed home is fundamentally seized from the previous owner when they become a defaulter or break the loan terms negotiated between them and the lender. Foreclosed properties often have a price tag below the market value, which makes them the best choice for many homebuyers.

While purchasing such a house can potentially save you money, the standards and steps associated with the process, such as the foreclosed home being inhabitable, can make things difficult.

The Requirements

There are a few requirements that you must fulfill to acquire an FHA loan. Once you meet them, you can move on to purchasing the foreclosed home. You’ll find those requirements enumerated and explained below.

  1. Borrower’s End

  • Credit Status – As the borrower, your credit score has to be 580 or higher to qualify for an FHA loan. If you have this score, you’ll be eligible to get a mortgage with a down payment of 3.5%, but only if you meet every criteria of the FHA loan. Then again, borrowers with credit scores as low as 500 can still avail of FHA loans, provided they pay an additional down payment of 10%, depending on the lender.

 

  • Repaying Ability – You must be capable of repaying the monthly payments of an FHA loan. Lenders will ask you to send your personal information, such as ID and proof of the presence of a stable job, along with a debt-to-income ratio of less than 45%. However, the exact percentage can differ based on every borrower’s unique financial circumstances.

 

  • Down Payment – The next point of consideration is the down payment. Every borrower has to be able to pay at least 3.5% of the property’s value as a down payment to qualify for an FHA loan. The value may rise to 10% at most, depending on the borrower’s credit status. Various down payment options exist to pay for this amount easily, including having the required money on hand, qualifying for a down payment assistance program, or receiving a gift of a down payment.

 

  • Mortgage Insurance Payments – You have to pay the upfront and monthly mortgage insurance premiums or MIPs. After that, you must continue to pay the insurance payments for as long as the loan lasts. Every borrower should consider using an FHA mortgage calculator to find out if applying for this specific type of loan is right.

 

  1. Property Considerations

  • Owner-Occupied/Primary Residence – The property for sale has to be used as the borrower’s primary residence. If the borrower already has a house that they use as their primary residence, they won’t qualify for an FHA loan that can be used for the new property of the borrower. FHA loans can’t be used for investing in rental properties and the like.

 

  • Minimum Standards of Home Inspection – You must ensure the property you’re purchasing meets the minimum home inspection standards for both safety and livability to qualify for the FHA loan. Standard FHA loans won’t usually be approved for “Fixer-Upper” homes. However, “fixer-upper” properties can be allowed under the FHA 203(k) program. Discuss the matter with your Loan Officer to know whether it’s a viable option for you.

 

  • Appraisal – An appraiser approved by the FHA has to appraise the property so that the lender knows the house successfully meets the minimum FHA loan requirements and regional building codes while establishing the home’s fair market value.

 

The Advantages & Disadvantages of Buying Foreclosures

Before you move ahead with buying a foreclosure with an FHA loan, potential buyers and borrowers must be aware of both the pros and cons of this process. Here are the most important ones that you should consider.

  1. Advantages

  • Reduced Down Payment – A small down payment required to purchase a foreclosure with an FHA loan can be as low as 3.5%. This makes it an exceptionally attractive option for borrowers with poor credit.
  • Easier Credit Requirements – The low credit score of 580 lets borrowers with a small or non-existent credit score qualify for an FHA mortgage that they wouldn’t have qualified for otherwise.
  • Easier Qualifications – Borrowers searching for their first home or just starting may notice FHA loans provide a real gateway to becoming a homeowner.

 

  1. Disadvantages

  • Original Condition – A foreclosed property is sold in the exact condition a borrower first sees it. In other words, the mortgage lender or the property owner won’t repair or fix the property in any way. The borrower will be responsible for performing maintenance, repairs, or fixing the property, apart from undertaking planned home remodeling projects.
  • The Livability Standard – A foreclosure has to pass the livability standard of the FHA in the form of an appraisal, ensuring the property meets the minimum standards enforced by the Department of Housing and Urban Developments, or HUD.
  • Excessive Competition – Lower prices attached to foreclosed houses mean many others will be searching for such homes. Most of the competing offers will be in the form of cash, making them more appealing to lenders than deals involving large amounts of financing.
  • A Slow Process – The length of the qualification process combined with the list of eligibility requirements makes successfully processing FHA loans a lengthy endeavor, from the application phase to the final closing.

 

Where to Look for Foreclosures?

You should be able to find foreclosed properties on numerous sites offering real estate listings. You can also look for foreclosed homes in newspapers, bank offices, and agencies.

While the internet is an excellent informal source to begin searching for foreclosed properties you can buy with FHA loans, it’s worthwhile to look elsewhere to ensure you don’t overlook any options.

 

Final Statements

When you search for a house after foreclosure, an FHA loan from our FHA Mortgage Broker can help you. However, you must be aware of every aspect of FHA loans, the advantages and disadvantages, and whether the loan itself and the associated mortgage are right for you.

For any other questions about FHA loans, foreclosure, and loan products, contact us directly. Our mortgage officers will be more than happy to sort you out.

 

FAQs

Q1. What is the typical timeline for purchasing a foreclosure with an FHA loan?

A1. The procedure of buying a foreclosure with an FHA loan can be more time-consuming than purchasing a non-foreclosed house due to additional steps, such as thorough inspections and appraisals. On average, the timeline may range between thirty and sixty days, but it may take longer if any problems arise during the home inspection or appraisal process. The need for repairs to meet the FHA standards or delays in obtaining the required documents can further extend this timeline.

 

Q2. What specific condition requirements must a foreclosed property meet to qualify for an FHA loan?

A2. A foreclosed property has to meet specific condition requirements to qualify for an FHA loan. These requirements ensure the property is safe, secure, and habitable. The home has to pass an appraisal conducted by an FHA-approved appraiser, who will verify that the property meets the minimum standards set by the Department of Housing and Urban Development, or HUD. This includes the presence of a structurally sound foundation, roof, and walls; functioning heating, electrical, and plumbing systems; and no health and safety hazards. “Fixer-upper” properties may still qualify under the FHA 203(k) program while facilitating the financing of necessary repairs.

 

Q3. Are there additional costs associated with buying a foreclosure through an FHA loan?

A3. Yes, there may be additional costs when buying a foreclosure through an FHA loan. These may include upfront and monthly mortgage insurance premiums (MIP), which are required for FHA loans. Furthermore, as foreclosed properties are sold “as-is,” buyers may need to set aside some money for repairs and maintenance to bring the property up to FHA standards. An appraisal fee, inspection fees, and potential costs for obtaining necessary permits for repairs should also be considered. These additional costs can add up, which means it’s vital for buyers to prepare financially as they have to spend money on more than just purchasing the property and making a down payment.

 

Are Real Estate Broker Fees Tax Deductible?

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Understanding whether real estate broker fees are tax deductible can help homeowners and investors maximize their tax benefits. Here’s a breakdown of how these fees are treated under U.S. tax law.

What Are Real Estate Broker Fees?

Real estate broker fees, also known as commissions, are payments made to real estate agents for their services in buying or selling property. These fees are usually a percentage of the property’s sale price, typically ranging from 5% to 6%.

Deductibility for Homeowners

For homeowners, real estate broker fees are not directly tax deductible. However, they can affect your tax situation in other ways:

  • Cost Basis Adjustment: Broker fees paid when purchasing a property can be added to the property’s cost basis. The cost basis is the original value of the property plus any additional costs, such as broker fees. This adjustment can reduce your capital gains tax when you sell the property.
  • Selling Costs: When you sell your home, broker fees and other selling costs can be deducted from the sale proceeds to determine your net gain or loss. This helps in calculating capital gains tax liability.

Deductibility for Real Estate Investors

Real estate investors have more opportunities to deduct broker fees:

  • Rental Properties: Broker fees paid for purchasing rental properties can be added to the property’s cost basis. Additionally, if you pay broker fees to find tenants, these can be deducted as rental expenses in the year they are incurred.
  • Business Expenses: For properties held for business purposes, broker fees can be considered part of the acquisition costs and included in the cost basis. Broker fees related to the sale of a property can be deducted from the sale proceeds to reduce taxable gains.

Investment Properties and Capital Gains

For investment properties, broker fees are part of the transaction costs. Here’s how they work:

  • Purchase Costs: Broker fees add to the initial cost basis, reducing capital gains when the property is sold.
  • Selling Costs: Fees paid to brokers when selling a property reduce the amount of taxable capital gain.

Impact on Capital Gains Tax

Capital gains tax is calculated based on the difference between the selling price and the adjusted cost basis of the property. By including broker fees in your cost basis, you effectively lower the capital gains tax liability.

Primary Residence Exclusion

If you sell your primary residence, you may qualify for a capital gains exclusion—up to $250,000 for single filers and $500,000 for married couples filing jointly. Broker fees and other selling costs are subtracted from the sale proceeds, which can help in reducing the taxable gain and potentially maximizing your exclusion benefit.

Documentation and Record-Keeping

Proper documentation is crucial for claiming any deductions or adjustments related to broker fees. Maintain detailed records of all fees paid, as well as receipts and contracts. This documentation will support your claims in case of an audit.

Conclusion

While real estate broker fees are not directly tax deductible for homeowners, they play a significant role in adjusting the cost basis and reducing capital gains tax. For real estate investors, these fees can be more directly deductible as business expenses or rental property costs. Understanding how these fees affect your taxes can help you make more informed financial decisions and potentially save on taxes. Always consult with a tax professional to ensure you’re taking full advantage of any deductions and to stay compliant with tax laws.

Who Pays Mortgage Broker Fees in California?

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When you’re navigating the complex world of home buying or refinancing in California, understanding who pays the mortgage broker fees can be crucial. Mortgage brokers play a vital role in securing the best loan terms for borrowers, but their services come at a cost. Here’s a comprehensive look at who typically pays these fees and how it all works.

What is a Mortgage Broker?

A mortgage broker is a middleman between you and potential lenders. They compare various loan options on your behalf, aiming to find the best mortgage rates and terms. Brokers save you the hassle of applying with multiple lenders individually and help you understand different loan products.

Broker Fees Explained

Mortgage broker fees are the costs associated with the services they provide. These fees can vary widely but generally fall into two main categories:

  1. Borrower-Paid Compensation: The borrower pays the broker’s fee directly.
  2. Lender-Paid Compensation: The lender pays the broker’s fee, often incorporated into the loan’s interest rate.

Who Pays the Fees?

In California, both borrowers and lenders can pay mortgage broker fees. Here’s a detailed look at each scenario:

Borrower-Paid Compensation

When the borrower pays the mortgage broker fee, it’s typically a percentage of the loan amount. This fee is usually paid at closing and can range from 1% to 2% of the total loan. For example, if you’re taking out a $500,000 mortgage, the broker fee might be $5,000 to $10,000.

Advantages for Borrowers:

  • Transparent Fee Structure: You know exactly how much you’re paying for the broker’s services.
  • Potentially Lower Interest Rates: Since the fee is not rolled into the interest rate, you might secure a lower rate.

Disadvantages for Borrowers:

  • Out-of-Pocket Costs: You need to have the funds available to pay this fee upfront or at closing.

Lender-Paid Compensation

Alternatively, the lender may pay the broker fee. In this case, the broker’s compensation is built into the loan’s interest rate, meaning you might pay a slightly higher rate over the life of the loan.

Advantages for Borrowers:

  • No Upfront Costs: You don’t need to pay the broker’s fee out of pocket.
  • Simplified Process: One less cost to worry about at closing.

Disadvantages for Borrowers:

  • Higher Interest Rates: Since the fee is incorporated into the rate, you might end up paying more in interest over time.

Regulations and Disclosure

In California, mortgage brokers must comply with federal and state regulations that protect consumers. The Loan Estimate and Closing Disclosure forms, provided by the lender, outline all fees, including the broker’s compensation. These documents ensure transparency and help you understand the total cost of your mortgage.

Negotiating Broker Fees

It’s important to know that broker fees are often negotiable. Here are some tips for negotiating:

  • Shop Around: Compare fees from different brokers to ensure you’re getting a fair deal.
  • Ask for a Breakdown: Request a detailed explanation of what the fees cover.
  • Leverage Your Credit: If you have a strong credit profile, use it as a bargaining chip for lower fees.
  • Consider a No-Cost Loan: Some brokers offer no-cost loans where fees are absorbed by the lender through a higher interest rate.

Impact on Your Mortgage

Understanding who pays the mortgage broker fee can significantly impact your mortgage terms and overall costs. Here are a few scenarios:

  • Lower Upfront Costs vs. Long-Term Savings: Paying the fee upfront can save you money on interest over time, but if cash flow is tight, having the lender pay might be more manageable.
  • Total Loan Cost: Calculate the total cost of the loan with both options. Sometimes a slightly higher interest rate might be less expensive in the long run compared to paying substantial fees upfront.

Conclusion

Mortgage broker fees in California can be paid by either the borrower or the lender, each with its own set of advantages and trade-offs. Understanding these options and negotiating effectively can help you manage these costs and secure the best possible mortgage terms. Always review your Loan Estimate and Closing Disclosure carefully to ensure you know exactly what you’re paying for and to avoid any surprises at closing. By being informed and proactive, you can make a well-informed decision that aligns with your financial goals.