The Difference Between Commercial Real Estate and Residential Mortgage Loans
There are many differences between commercial real estate and residential mortgage loans and understanding these differences can help you succeed in the commercial property industry. You will want to know what types of things are different between the two types of loans as well as what to look out for when applying for one.
When applying for loans, you will need to go through an underwriting process where your information and reputation are looked at in different ways before the underwriter decides to lend you money. For residential loans, this will involve your personal financials as well as the value of the home-based on similar ones in the area.
For commercial property loans, underwriters will look at your personal and portfolio financials, the value of the property based on the cap rate and income supported by market comparables, and your record as a property investor.
Term and Amortization
Commercial real estate loans usually have a shorter term than the amortization whereas these things are usually the same with a residential loan. What this means is that while you may have a twenty-five-year amortization schedule, the time it would take you to pay it off with your standard payment amount, but only a five-year term in which to make full payment.
Some commercial loans will have a penalty, usually a higher interest rate, if you pay it back before the end of the term. These can be tough to navigate through the fine print, so it is a good idea to only take loans you want to pay on for the full term.
Pre-Approval vs Term Sheets
Buying residential property means that you are usually getting pre-approval on the loan and can finalize the terms once you have found a property. Buying commercial property, on the other hand, means that you have a term sheet that is dependent on the type of property you can get under contract.
The recourse involved in defaulting on a commercial versus residential mortgage can look very different as well. In residential properties, you lose your equity and home to the bank and in commercial properties, you lose your equity, the property and are usually liable for the full loan amount.
Purchasing commercial real estate is much different than buying residential property and moving from one kind of investment to the other can take a lot of research and reading find print. The more research you do into the ins and outs of real estate investment of any kind, the better return you are likely to see.