There is often some confusion when it comes to choosing a Commercial or a Residential loan. Even though they use the same mortgage system, there’s a completely different set of rules for each one.
Residential loans are for one to four-unit homes, condominiums and townhouses. Commercial loans will cover everything else, such as 5+ unit properties/apartments, offices, stores, churches, gas station, mixed use properties, etc.
Residential mortgages require individual income and asset verification for qualification, where the commercial mortgage requires the performance of the collateral, such as a profit and loss statement from the properties pledged. The maximum residential loan amount is determined by the borrower’s income, credit worthiness and repayment ability. The commercial loan amount is calculated based on the history of the properties income and expenses.
There are possibilities that commercial loans may be issued in a corporation’s name, rather than the individual’s name. Commercial properties also have a higher turnover; therefore, adjustable mortgage rates are more common in commercial loan territory. It is very common to see prepayment penalties in commercial mortgages as the investors view these loans with higher risk and would like to protect their returns. It is rare to see residential loans with prepayment penalties. The majority of commercial loans are held by the lender’s portfolio versus residential loans which often are sold into mortgage backed securities on Wall Street. You have a better chance to successfully renegotiate your rates and terms with the commercial lenders. Finally, a typical commercial loan process can take approximately 60 to 90 days to close as the appraisers need more time to prepare the appraisal reports and the lenders need more time to review the properties characteristics along with the cash flow analysis. Residential loans usually take 30 days or less to close.
When you are looking for a financing option, it’s critical to talk to the RIGHT mortgage professional. You need an advocate who understands both types of financing and can explain the pros and cons.