Many individuals look to avail loan on their commercial property; however, many have no idea how to go for it. Availing a loan on the residential property is popular, simpler to obtain and is widely provided by financial institutions and banks. On the contrary, availing of loans on commercial property is not very easy, and an individual’s knowledge in this regard is even very limited.
Commercial properties can simply be classified into 2 broad kinds. They are retail outlets and office space. These 2 classes are further divided into 2 categories – under construction and ready for possession. When it is about financing against commercial lands or properties that are under construction, many lenders generally are apprehensive if buyers or seekers are investors & not end-users.
Here’s how loan against property work –
Like an SBI Loan Against Property or loan against property availed by other lenders, a loan against commercial property too can be availed to fund all types of expenditures based on the market value of the commercial real estate. It can be business expansion, higher education, debt consolidation or marriage. You can avail loan against commercial property by mitigating the simple mortgage eligibility parameter and keeping all necessary documents handy.
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The distinction between commercial and residential property financing:
While the documents required by lenders to ascertain your loan eligibility are similar, there are a few distinctions you must know. Note that for calculating your loan against commercial property EMI, you can use a Loan Against Property EMI Calculator as it works in the same fashion.
LTV or loan to value ratio – For residential funding, it ranges anywhere between 75 percent and 90 percent; however, for commercial buys, the funding percentage is restricted to 55 percent. It means higher self-contribution by the borrowers.
Higher fees – Processing charges for residential properties have a standard fixed charge equaling Rs 10,000. As per some schemes, borrowers are even provided with a charge as low as zero. However, for commercial buys, the fees are fixed at 1 percent of loan proceeds, and fee lenders may lower it to 0.50 percent if they like the borrower’s credit profile.
High-interest rate: The interest rate is a crucial factor while borrowing, and in the case of a loan against a commercial, it is nearly 1 to 2 percent higher than the residential property, and it may be 4 – 5 percent higher if the financial documents hold less strength.
Builder Category: Lenders are extremely particular when it is to builder profile if the land is under construction. Whether the commercial property is ready in time or not is of paramount importance. Usually, commercial property construction takes less time and occupants in the property are fewer than residential. For instance, buyers for a floor plate or supposed number of toilets constructed in the commercial set up are extremely less with zero shower region etc. This makes construction simpler and less time taking. Lenders study the earlier delivery schedule by the builder to determine whether to lend the property.
Technical appraisal: Building must consist of all reasonable technical specifications. May it be an elevator, shaft, emergency exit, fire extinguisher, double ladder and others, the lender’s technical appraisal team ensures to authenticate each detail. It is not that the residential property is not completely verified, but there include more aspects for inspecting commercial properties.
Obtaining all the statutory approvals: The builder must avail all relevant approvals like clearance from different departments like forest, fire etc. There must be zero demolition risk on property owing to pending approval. Likewise, in the case of a residential property, it is stricter.
Loan repayment tenure: Loan repayment tenure provided for residential land or property may go up to 30 years, but in the case of commercial purchase, it mostly is restricted to 10 years. It means, again, a higher EMI flow for the loan borrowers.
Appraisal: In case the purchase cost is enhanced by the seller or builder to allow the borrower to take higher money from the lender, it is lowered by the expert appraisal team, which is outsourced by the bank lender.
Residual property age: Extremely old properties might not be financed by the lender owing to the risk linked with building age and owing to the lack of fire exit or proper planning. Thus, conduct an instant check-up with an advisor. Even if it is a known commercial land or property where huge corporations stay, it might not be financed by a few lenders.
Minimum area: Commercial or residential area in India is measured in terms of square feet. In the case of retail outlets, small spaces are known as vanilla, where generally, bank ATMs are built. They can be less than 110 square feet. Lenders can refuse to finance any space in case it is 250 square feet or even less. Distinct lenders have distinct policies concerning such matters, so it is better to double-check with the loan advisor.
What are the important documents required to avail commercial property loan?
Loan application: A filled up loan application form with three photos.
Identity proof: Passport, PAN, driving license or voter ID card
Address or residential proof (if any): Electricity bill, telephone bill, water bill, driving license, piped gas bill and current copy of Aadhaar card, driving license and passport.
Property documents: Construction permit, registered agreement/stamped agreement, or letter of allotment. Share certificates like electricity bills, maintenance bill, property tax receipts, bank account info, and payment receipts – all showing payments made to the seller or builder.
Account details: Past six months bank account details for all the bank accounts held by you to know if there is any previous loan from lenders or banks, then loan account statements for the past one year.
Income proof for co-applicant, salaried, or guarantor: Salary slips of past three months, form 16 copy, last two years IT returns etc.
Important income proof for the non-salaried applicant, guarantor, or co-applicant: Business address proof, income tax returns for the past three years, profit and loss balance sheet for the past three years, business license details, qualification certificate and TDS certificate, i.e., form 16.