Commercial vs Residential loans

As someone who helps clients with both residential real estate purchases and commercial space purchases, I think it is important to talk about some of the differences between the two when it comes to the financial side of the process.

 

One major difference between the two is what lenders look at income wise when they give a loan. If you are getting a residential loan, the lender will look at your personal gross income and the amount of debt you owe. Typically, lenders like to see the debt to be no more then 45% of your gross income.

For commercial, when a company applies for a loan, lenders look at the ability of the property being purchased to generate income compared to the debt on it.

 

Another difference between the two is the initial down payment when going to purchase a property. With residential, a down payment is negotiable and depends on the type of loan you get.

With commercial property, the loan is considered to be much riskier then a home mortgage and as a result, lenders usually require around 20% as a down payment with an 80% loan-to-value ratio.

 

If you have purchased residential recently you know that one of the things you work with your lender on first is just how long the mortgage will be which also plays into your down payment and what your monthly payments will be. The typical residential loan is 30-years but can be negotiated anywhere from 15-year or even up to a 40-year loan.

For a commercial loan because the risk is higher, many lenders will make a 10-year payout. Again, there is always room to negotiate but many business properties are often sold to long-term investors before the 10-year time frame is up.

 

With every loan there has to be some sort of penalty if payments are not made on the property. Residential loans can be paid off at any time regardless of the payout term length without any penalties.

Commercial real estate loans typically do have prepayment penalties which all goes back to the risk of the loan. The loan prepayment penalty is on a sliding scale that grows smaller as a percent of the loan each year.

 

If you have any questions in regards to residential or commercial loans, contact me today and let’s chat about them. I also have some wonderful lenders I work with who would be happy to answer any and all your questions, they are the pros at this!