So, you need a banker. Obviously you aren’t subscribing to the Dave Ramsey style of never getting a mortgage. He’s a smart guy and his stuff is great for 95% of the population that have difficulty setting a budget and paying back their loans. For the rest of us, we see the value of leverage and can tell the difference between a good loan and a bad one. But that’s a topic for another time.
Step 1: Determine what you plan on buying
Is this going to be a house in your name or will it be about anything else? Spoiler – you will likely be looking for a loan for anything else. But, for completeness, let’s look at the residential loan first.
Residential Loan
If you are putting your purchase in your name then a residential loan is likely what you want. The benefits of doing this include:
- It’s usually easier to get the loan; the government guarantees many of these and banks aren’t as worried they won’t get paid back.
- The interest rate is lower. This is generally for the same reason as above.
- The term is usually longer. You can get a 30 year term, which means it takes longer to pay off and you will pay more over the term, but the monthly payments are less.
The big disadvantage is that you can’t have your LLC own the property. You lose the benefits of anonymity and liability protection with a residential loan.
Commercial Loan
This loan will be for any other property and structure you put together. The big benefit is that you have some liability protections, but don’t make the mistake of thinking you are completely immune. Another benefit is that the businesses debts don’t apply to your other companies or your personal finances (unless you have agreed to this in a contract, such as is commonly in a mortgage contract).
Step 2: Do an Internet Search
Or search websites such as Bigger Pockets to see commercial lenders in your area. Compile a list.
Step 3: Learn About Mortgages and Determine What Terms You Want
This blog is a great place to find out about mortgages. In fact, I need to do one on the banking terms you will encounter. Find out what are meant by amortization, rate, prepayment penalty, guarantee, balloon, loan-to-value and term and you will be able to talk their language. Determine what is most important for you: is it the rate, or do you want the amortization to be longer? Are you willing to personally guarantee the loan?
Step 4: Reach Out to Bankers
Begin making phone calls to each of the bankers on your list. Make sure you have a property identified and what you expect to pay for it. It doesn’t need to be under contract but if it is, then it shows you are more serious. Lenders are eager for business and you shouldn’t have much trouble getting them to call you back. Many will want to talk you into residential mortgages in my experience. If you have chosen commercial, don’t let them.
From these calls you’ll get a good idea who you want to work with and what terms they are offering. They won’t be able to give you a firm commitment at this time, but they can give you an idea either over the phone or in a day or so. Be sure to let them know that you are calling multiple bankers and that you are looking for a long-term relationship. It’ll be even better if you are willing to move your personal finances to their bank.
Step 5: Evaluate and Choose
Set a time limit for them to get back to you. Those who don’t call back get booted; they aren’t going to be responsive enough when you need them. They will return to you with terms hopefully near what you asked. The terms are important, but more so is whether you think you can have a long-term relationship with a banker or not. Shopping for a low interest rate seems very important but if you aren’t going to hold the property for very long, a rate difference doesn’t amount to much. Do the math. Once you have chosen, have the courtesy to call the others back and tell them the reason you didn’t select them. Give them the opportunity to get your business in the future. You can also read my post about how to get a commercial loan.
Now that you have a banker and terms ask the banker if you can lock it in. They will keep their word on the terms for a certain number of days, usually 30 or 60. This gives you time to get the property purchased. Have fun and good luck!
