Many people desire to borrow money against commercial property but lack the necessary knowledge. Residential property loans are undoubtedly more popular, simpler to get, and available from more banks and financial organizations. On the other hand, obtaining a loan for commercial property such loan against commercial shop is difficult, and the general public’s understanding of the subject is very restricted.
Two major categories can be used to categorize commercial properties. They are both workplaces and shops. These two classifications can be further separated into two groups: under construction and ready for possession. When it comes to funding against a commercial property that is under construction, lenders are usually apprehensive if the buyers are “investors” and not end-users.
Difference between residential and commercial property financing
The following differences exist even though the financial documents the lender requests to determine the borrower’s loan eligibility are similar:
- 1. LTV – Loan-to-Value Ratio
For residential finance, the loan-to-value (LTV) ratio runs from 75% to 90%; however, for commercial transactions such as a loan against collateral, the financing percentage is capped at 55%. So, borrowers will have to put up more of their own money.
- Higher Fees:
The standard fixed processing cost for residential transactions is Rs. 10,000. In some systems, borrowers may also be charged a cost of “zero.” Although it is typically 1% of the loan amount for commercial purchases, some lenders will lower it to as little as 0.5% if they like both the borrower and the property.
- High ROI
The rate of interest (ROI), a crucial consideration when borrowing money, is at least 1% higher for loans secured by commercial property such as a loan against commercial shop than for residential ones and can reach 4%.
- Builder Category
If the home is still being built, lenders are highly cautious about the builder’s profile. It is crucial to know whether the commercial property will be ready on schedule or not. In contrast to residential development, commercial property construction typically takes far less time and has fewer residents.
- Technical Appraisal
The building must meet all justifiable technical requirements. The lender’s authorized technical appraisal team will confirm every aspect, whether it relates to shafts, elevators, escalators, fire extinguishers, emergency exits, double ladders, etc. Commercial property inspections cover more ground than residential property inspections, and both are as important.
- Obtaining all necessary statutory approvals
For a loan against collateral, the borrower is required to obtain all necessary approvals, including a plan that has been approved and clearance from several departments, such as fire and forest. The property shouldn’t be at risk of demolition because of any pending approvals. Similar restrictions apply to residential property as well, but as was already indicated, they are tighter and more numerous for commercial structures.
- Loan Term
The loan term offered for residential property might last up to 30 years, whereas it is typically just 10 years for commercial transactions. This results in increased EMI payments for the borrower.
- Appraisal
If the builder or seller raises the purchase price to allow the financial institution to demand more money, the lender will have an expert appraisal team it has contracted with to lower the price. Almost all of them have several experienced appraisal agents who independently submit reports.
Documents required to get a loan on a commercial property
Fill out the loan application form and attach three photos.
Proof of Identity (Anyone): Voter ID Card, Passport, Driver’s License, or PAN
- Telephone bill, electric bill, water bill, piped gas bill, a most recent copy of a passport, driver’s license, or Aadhar card are all acceptable forms of residence or address proof.’’
Property Documents
- A building permit (where applicable)
- Stamped agreement for sale, registered agreement, letter of allotment
- A permit for occupation (in the case of ready-to-move property)
- Share certificates like maintenance bills, electricity bills, property tax receipt
- Payments made to the builder or seller, as well as payment receipts or bank account information
Account Details
Information about the applicant’s bank accounts from the previous six months.
The loan account statement for the preceding year is used to determine whether there have been any prior loans from other banks or lenders.
Property Documents
- A building permit (where applicable)
- Stamped agreement for sale, registered agreement, letter of allotment
- A permit for occupation (in the case of ready-to-move property)
- Share certificates like maintenance bills, electricity bills, property tax receipt
- Payments made to the builder or seller, as well as payment receipts or bank account information
Account Details
Information about the applicant’s bank accounts from the previous six months.
The loan account statement for the preceding year is used to determine whether there have been any prior loans from other banks or lenders.
Co-Applicant/Guarantor/Salaried Applicant Income Proof
- pay stubs over the previous three months
- Copy of Form number 16 for the last 2 years and also a copy of IT Returns for the last 2 financial years, accepted by the IT Department.
Non-Salaried Applicant/Co-Applicant/Guarantor Income Proof
- IT returns for the last three years with business address verification
- Last three years’ balance sheet of profit and loss
- details of business license (or equivalent)
- Certificate TDS (Form 16A, if applicable)
- Certificate of Qualification (for professions such as CA/Doc)
Conclusion
Loans for commercial properties such as a loan against commercial shop are more expensive to get than loans for residential properties since the term is shorter, the interest rate is higher and more self-contribution is required. However, there has always been a significant “return” on investment in commercial real estate. So why not borrow money against your property if it “qualifies” for finance and use it to further your goals in both life and business?