5 Mistakes Developers Make When Applying for Commercial Mortgages (And How to Avoid Them)

Securing a commercial mortgage is essential for property developers looking to fund large-scale projects. However, there are common mistakes that can complicate the process or lead to rejections. Here are the top five mistakes developers make when applying for commercial mortgages—and how to avoid them.

1. Inadequate Financial Preparation

One of the most frequent mistakes developers make is not having their financials in order before applying for a commercial mortgage. Lenders require a clear and detailed view of your financial health, including credit history, income statements, and existing debt obligations.

How to Avoid It:

• Prepare all necessary financial documents, such as profit and loss statements, tax returns, and balance sheets.

• Ensure your credit score is healthy by resolving outstanding debts or financial issues before approaching a lender.

• Work with a financial advisor if needed to make sure your application reflects strong financial health.

2. Underestimating the Deposit Required

Developers often underestimate the size of the deposit required to secure a commercial mortgage. Unlike residential mortgages, which typically allow for deposits as low as 10%, commercial mortgages often require a deposit of at least 25%–30% of the property's value.

How to Avoid It:

• Research the specific deposit requirements for commercial mortgages.

• Secure sufficient funds well in advance to avoid any surprises when the time comes to make the down payment.

• Explore alternative funding sources, like bridging finance, to meet your deposit requirements if needed.

3. Not Having a Clear Exit Strategy

Many developers fail to provide lenders with a clear exit strategy for how they plan to repay the loan. Commercial mortgage lenders want to know how they will get their money back—whether through property sales, refinancing, or rental income.

How to Avoid It:

• Prepare a detailed exit strategy showing how you plan to repay the loan.

• Include information on future sales, projected income streams, or refinancing plans.

• Make sure the exit strategy is realistic and aligns with your overall project timeline.

4. Misjudging the Loan-to-Value Ratio (LTV)

Many developers overestimate how much they can borrow based on the Loan-to-Value (LTV) ratio. Lenders typically offer commercial mortgages at 65%–75% LTV, meaning developers need to cover the remaining amount either through cash or additional financing.

How to Avoid It:

• Get an accurate valuation of the property before applying for the mortgage.

• Understand the LTV ratios offered by different lenders and adjust your borrowing expectations accordingly.

• Consider alternative financing, such as mezzanine finance, to fill any gaps if your LTV falls short.

5. Failing to Shop Around for the Best Deal

Developers often make the mistake of applying for a commercial mortgage with the first lender they encounter, missing out on potentially better terms elsewhere. Different lenders have varying requirements, interest rates, and fees.

How to Avoid It:

• Compare multiple lenders to ensure you're getting the best deal.

• Consider working with a broker like LivFinance, who can help you find the most suitable lender for your specific needs.

• Don’t forget to account for all fees and interest rates, not just the headline rate, when comparing offers.

Key Takeaways:

• Ensure your financials are thoroughly prepared before applying.

• Know the deposit requirements and have a solid down payment ready.

• Develop a clear exit strategy to reassure lenders of your repayment plan.

• Don’t overestimate the LTV—understand the maximum you can borrow based on the property's value.

• Compare different lenders and seek professional advice to get the best commercial mortgage terms.

By avoiding these common mistakes, developers can streamline the process of securing a commercial mortgage and set themselves up for success. LivFinance offers expert guidance on navigating commercial mortgage finance and helps you avoid these pitfalls to secure the best possible deal.

For more advice on commercial mortgage finance, contact LivFinance today.