Getting a commercial loan with bad credit

The decision

A credit problem changes which lenders will look at the deal and what they charge. Your choice is between paying more for a lender that lends on the property, or restructuring the deal so a cheaper lender can rely on someone else’s credit. Price both.

How much credit matters, by lender type

Lender type	What it leans on	How a credit event lands
Private and hard money	Equity in the property, plus extra collateral	Often accepted; priced in the rate and points
Non-bank DSCR lender	The rent covering the payment	Often accepted with a rate add-on or lower leverage
Credit union	Membership history, the property, mitigants	Case by case; flexible on structure
Community bank	You, the guarantor, and deposits	Hard unless a strong co-guarantor signs
Fannie Mae and Freddie Mac	Creditworthy, experienced sponsor	Recent events usually disqualify
CMBS conduit	Property cash flow, with sponsor screening	Background checks still apply to the carve-out guarantor

What private lenders take as security tells you how they think about risk. One public lender’s filing describes its collateral as first mortgage, often with extra collateral, an ownership pledge or personal guarantees¹. Another describes small-balance loans as commercial first mortgages often also backed by personal assets or subordinate liens². In other words, the weaker the credit, the more of your other assets go on the line.

The options, ranked for a borrower with credit problems

1. Bring a strong co-sponsor or guarantor. A partner with clean credit, liquidity and experience can sign as the key principal. You give up some economics, but the deal moves to bank or agency pricing.
2. Non-bank DSCR loan. For small apartments, mixed-use and small commercial, this is usually the cheapest lender that accepts a credit event on its own. One public investor lender’s held-for-investment production carried a weighted average coupon of 10.0%³, and its whole portfolio a weighted average LTV at origination of 64.6%⁴. Its loans are fully amortizing, without large balloon payments⁴.
3. Credit union. Worth a call if you are a member. A personal guarantee is not required, but a credit union that skips it must document offsetting mitigants⁵.
4. Private or hard money loan, then refinance. Use it to close or to stabilize, with a written plan to refinance once credit and the property improve.
5. Seller financing. A seller who carries part of the price can reduce what you need from a lender. It needs the senior lender’s consent if there is one.

Worked example: the cost of a year on private money

Illustration. You need $1,500,000 to buy a mixed-use building. A private lender quotes 11% interest-only, two points, 12 months. A bank would lend at 7% if a partner signed as co-guarantor.

Year one cost (illustration)	Private loan	Bank loan with co-guarantor
Interest	$165,000	$105,000
Points	$30,000	lender fees vary
Total	$195,000	about $105,000 plus fees

The private loan costs about $90,000 more in year one before fees. That is the price of not bringing a partner. If the partner wants less than that in equity or fees, the partner is the cheaper capital. If you are confident the credit event will age out in a year and the property will refinance, the private loan can still be right.

Watch the default terms. The same public lender’s standard default rate is generally 18.0%¹. A missed maturity on a private loan gets expensive fast.

What to have ready

• A one-page letter explaining the credit event: what happened, when, what was resolved, and what has been clean since.
• Proof of resolution: satisfaction of judgment, discharge papers, payoff letters.
• Bank statements showing liquidity after closing.
• The property’s rent roll and operating statements. Strong property numbers are your best argument.
• A refinance plan if you take short-term money: target lender, target date, what must improve.

Pitfalls

1. Hiding the event. Background and credit checks find it. Disclose first.
2. Taking short money without an exit. Short terms are the norm for private loans. Know your refinance path before you sign.
3. Signing broad cross-collateral pledges. Extra collateral can tie up your other properties. Negotiate a release once the loan is paid down.
4. Ignoring usury and fee rules. Rates and fees above state limits can be unenforceable or worse. Ask counsel.
5. Overpaying for speed you do not need. If a bank or DSCR lender can close in time, the private loan’s cost buys nothing.