1. How much do I need, and how much can I afford?
These are the two questions you need to ask yourself before the application begins in earnest. How much do you need for your venture, and will you be able to afford to make the repayments?
If you are funding a residential or commercial letting business, affordability will be based on a rent to interest (RTI) calculation, more commonly and simply known as ‘rental cover’. The rent you charge your tenant must cover the interest payments of your loan by a certain amount.
If you are running the business yourself, your expected operational income will determine your affordability. Many commercial lenders prefer you to have experience in the industry sector you are investing in, and you should be able to support your application with accounts and a business plan.
You will also need a plan to repay the principal of the loan at the end of the loan term. This could be through the sale of the asset against which the loan is secured, or through another vehicle. Alternatively, you could opt for a part or full repayment plan.
2. Check your credit profile
A clean credit profile is vital for most mortgage applications. Anything from historic CCJs to credit arrears will count against you, and limit your choice of funding to a handful of ‘sub-prime’ lenders.
Before you begin your application, check your credit profile through one of the three main credit referencing agencies:
Each of the agencies gathers different details. It appears from consumer experience that more lenders use Equifax and Experian than Callcredit 1, so prioritising these agencies when polishing your credit history might be a good idea.
Armed with your credit report, you can go through it with a fine-tooth comb and highlight any elements that might jeopardise a funding application. If there are any inaccuracies, errors or simply discrepancies you wish to explain further, you can also apply to add a short explanatory note (called a ‘notice of correction’) to your report.
If you do wish to add such a notice, it is recommended that you contact each of the referencing agencies to ensure that they all hold the correct information.
Note: Certain discrepancies, such as repaid CCJs or arrears over a certain age, may qualify you as a ‘near-prime’ customer – essentially, someone who has had credit difficulties in the past but is now on top of them. Near-prime customers can generally access a wider range of deals than sub-prime customers.
3. Contact an advisor
A commercial mortgage broker or bridging introducer will help you find the most fitting product for your circumstances, and some will also help prepare your application. Because many commercial mortgages are bespoke products that offer flexible terms, the market expertise of a broker can be invaluable.
During this initial stage of the application, you will be quizzed about your objectives and requirements. You will also be asked about your income. It is vital that you disclose information as fully and accurately as possible, in order to maximise the chance of your application being accepted.
4. The ‘decision in principle’
If your advisor finds a suitable lender, they will approach them to obtain a ‘decision in principle’ (DIP) – a provisional agreement to provide funding, pending a successful application. You will then be provided with more detailed information on the product, and how to take progress in your application.
5. The application
Once you begin your application, you and any other applicants will be required to provide supporting information, including proof of identification, proof of residence and proof of income.
- Employed applicants will usually be asked for 1–3 months’ payslips and/or a P60
- Self-employed sole traders will usually be asked for 1–3 years’ tax returns or an SA302 summary form, 2–3 years’ accounts and a statement of assets and liabilities
- Limited company applicants will usually be asked for 2–3 years’ audited accounts and a statement of assets and liabilities for each applicant
Your lender may also request to see bank statements.
You may also be asked to provide additional information, such as:
- Management figures
- Profit and loss forecast
- Business bank statements (if applicable)
- Information on partners and directors (if applicable)
6. Assessment and valuation
Your chosen lender will then assess your application and instruct a valuation of the property against which you are securing funds. You may have to pay the valuation fee.
You will also need to instruct a conveyancing solicitor to handle the transfer of property ownership and other legal work. Many lenders require you to use a conveyancer from their own approved panel.
If your application is successful, you will receive a formal offer from the lender. Your and the lender’s solicitors will coordinate the transfer of funds, and your mortgage application will be complete.
Written by Ben Gosling for specialist commercial broker Commercial Trust.
Remember to keep up repayments on your commercial mortgage or bridging loan; your property may be repossessed if you do not keep up repayments on any debt secured against it.
The FCA does not regulate some forms of commercial mortgage and bridging loan.