By Gibbes Hance
If you are new to the world of Commercial Property Loans, Commercial Business Loans, and the current problems with Commercial Loan Financing, it is important to know that there are significant differences between a residential loan and a commercial property loan. First of all, a residential loan is for a single-family residence but can be used for a multi-family property of 4 units or less. A commercial loan is needed if you are purchasing a multifamily property over 4 units. A commercial loan is also needed if you are expanding an existing business property, developing property, or in general, purchasing any property that will be used for commercial purposes. The make big properties on loan you can also bet for aussie pokies online casino games.
The primary purpose of commercial property is to generate income. In contrast, the primary purpose of a residential loan is to provide the borrower with a place of residence, not to produce income.
Second, the criteria used to evaluate both commercial and residential loans are very different. Lenders for commercial mortgage loans are concerned with the amount of income the property produces as opposed to lenders for residential loans who are concerned with the personal income and financial status of the borrower. In the case of the commercial loan, the main way the lender will assess the profitability of the business is to look at the debt service ratio which is the amount of income the property produces over the mortgage payment amount. In other words, the property must have enough income to support all the property expenses and the new loan payment. Of course, other factors such as borrower credit and betting at real money online slots, loan-to-value ratio, location and quality of the property, etc., are also considered when evaluating both commercial loan financing and residential loan. However, the primary criterion used for a commercial mortgage loan is the ability of the property to produce income.
Because commercial mortgage loans are viewed as riskier than residential loans, be prepared to pay both a higher down payment (at least 20% or more) and a higher interest rate. Both the down payment amount and the interest rate will largely be determined by the debt service ratio and the stability of the business. For example, if the property is a fully leased office or apartment building that is already producing a good income you can expect good terms. Even in this case, however, the down payment and interest rate will most likely be higher than your average residential loan.
Another difference between commercial and residential loans is the length of the loan term. Commercial property loans are usually short-term loans; the most common being an amortized 30-year loan with a balloon payment due after 3,5 or 10 years. Owners must then refinance or sell their property. Residential loans can of course have balloon payments, but it is not the general rule, as it is for commercial loan financing.
Yet another difference is the fact that almost all commercial mortgage loans have substantial pre-payment penalties over the first 4 years. The penalty amount which usually starts at 5% the first year is less each year until it is gone entirely in year five. This encourages the owner to keep the loan for at least 5 years and lowers the risk factor for the lender. A residential loan can also have a pre-payment penalty but it is not a standard composition as it is for most commercial loans.
A commercial mortgage loan has higher fees than a residential loan. This is due to several factors. First, a commercial property loan requires a more extensive and rigorous appraisal process than a residential loan making the appraisal fee more costly. Also, many commercial properties require environmental due diligence to make sure there are no environmental problems that could interfere with the loan process. Again, this is an added costly fee. Various other closing costs attached to a commercial loan and not a residential loan also help to raise the fees.
Residential and commercial mortgage financing requires a different set of documentation in the application process. This amounts to a lot more paperwork for the commercial mortgage loan applicant. Examples of additional information needed for a commercial loan are the current rent roll if buying a multifamily unit, a lease summary if the property is a commercial building and income and expense reports for the property. It is important for the commercial borrower to ask up front what documents will be required in order to have sufficient time to locate all the applicable documents.
Finally, be advised that the commercial mortgage loan and commercial business loan process generally take longer than your typical residential loan process. Closing times for residential loans average around 45 days, while commercial loans average at least a 60-day closing and can take up to nine months! Again, knowing ahead of time what is required for your loan will eliminate surprises and allow the loan to close on time.
Granted, the above differences higher down payment, higher interest rates, higher fees, pre-payment penalties, mountains of paperwork, etc. may sound discouraging. Remember, however, the reason you are pursuing a commercial mortgage loan is to produce income from either your property or your business and the extra money and work involved in the commercial mortgage loan process will be far outweighed by the income your property will produce.
