Archive for the ‘Commercial vs Residential Loans’ Category

Commercial Loans – How they differ from Residential Loans

Tuesday, April 21st, 2009

By Jon Swire,

Are you ready to buy your first Investment property but aren’t sure what types of commercial loans are available and how they differ from  residential loans?

Loans for investment property such as multi-family apartments and retail and office space are also referred to as commercial loans. And the lenders requirements for these loans differ greatly from residential, so you want to make sure you understand the differences before you start looking at buying a property that will require one.

The first and biggest difference is that the lenders are going to require you to put enough money down so the property debt covers. This means that you’ll have enough rental income each month to pay for all your expenses including taxes, insurance, and your mortgage, and still have some money left over. So, each month and year you’re going to have positive income and spendable cash flow. Be prepared though, because this typically means you’re going to be putting down a minimum of 20% and sometimes as much as 35-40% or more depending on the area you’re investing in.

The second difference is that commercial lenders are much more focused on the real estate than the borrower. So, they are going to be more concerned about the location of the property and the quality of the tenants and income stream rather than your credit history and annual income. Commercial lenders want to make sure that the property you’re investing in will continue to generate a healthy income year after year from which you can repay the mortgage you are borrowing. After all, their main concern is getting their funds back and not ending up owning the property.

Finally, commercial loans are typically fixed for 3, 5, or 10 years, and usually never longer. So, you can’t get a 15 or 30 year fixed that you often find in residential lending. After your initial fixed rate term expires, be prepared for your interest rate to adjust and float according to the Index you’re tied to, such as Prime or LIBOR. So, if you plan on holding the property longer, it’s a great time to consider doing a refinance when your rate begins to adjust.

I always suggest to my clients that they speak with a loan broker to discuss their situation and goals and fully understand the options available to them. Commercial lending can be quite different from residential, so do your homework and make sure you’re prepared.
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