Comparing Residential and Commercial Mortgages
When you apply for a mortgage, you’ll learn there is a huge difference when comparing residential and commercial mortgages. When obtaining a commercial mortgage, it’s important to recognize the differences in advance so you won’t hamper the application and approval process. First off, let’s compare the differences between residential and commercial real estate.
Residential real estate is considered single-family housing. So close your eyes and dream about all those big nice houses you want to live in one day. Are you closing your eyes and thinking about it? Well obviously not anymore, because you are still reading this blog post. Anyhow, nice houses, little houses, 4-unit complexes, mobile homes, vacant houses, and well you get the point.
Commercial real estate (CRE) refers to buildings (retail, office, industrial, etc.) intended to generate a profit, either from capital gain or rental income. For example, you’re probably reading this in your office building right now (hey, reading this blog post is way better than working). So is your office building considered commercial real estate? Why yes, it is. How about those expensive places where your wife buys all of her clothes? Is that commercial real estate? Yes, again. She’s shopping at a building (more like buildings) where the property owner has purchased that building for which he intends to generate a profit. There are plenty of other examples, but you probably get the point.
First, we’ll define mortgages for both residential and commercial real estate. Then we’ll compare the mortgage process for both types of real estate. See our fantastic comparison below:
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Residential Mortgage
Is a loan an individual obtains to purchase a house or other type of residential property (4 units or smaller). Generally this mortgage is for a property in which they will live.
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Commercial Mortgage
Is a loan for an investment property (commercial properties or residential property larger than 4+ units). The mortgage is secured by income generated by the property.
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Residential Mortgage Process
Underwrite the Borrower
• Debt to Income Ratios: Front & Back Ratio
• Credit Scores
• Employment stability (2+ years)
Loan Structures
• Lower down payment (as low as 5%)
• Lower interest rate (government induced)
• Longer terms (15 to 40 years)
• Recourse required
• Lower fees
• No prepayment penalties
Closing
• Average is 45 days
Industry Differences
• More transaction volume
• More emotional rather than logical
• Female dominated industry
• Immediate response time: 24.5/7
• Listing platform easily accessible
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Commercial Mortgage Process
Underwrite the RE Cash Flow
• Debt Service Coverage Ratios (DSCR)
• Loan to Value (LTV)
• Loan to Cost (LTC)
Loan Structures
• Higher down payment (usually 20% min)
• Higher interest rate
• Shorter term loans (5 to 20 years)
• Non-Recourse available
• Higher fees
• Prepayment penalties
Closing
• Minimum of 60 days
Industry Differences
• Less transaction volume
• Less emotion / More analytic
• More males within industry
• Slower responses: 9-5 business hours
• Listings not easily accessible
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In summary, there are some major differences when comparing residential and commercial mortgages. There is a lot more leg work involved when pursuing a commercial real estate loan. Although getting a commercial real estate loan can be a tedious task, it’s generally worth the extra effort. Hopefully this post helped you out a bit. If so, don’t be a stranger; share this story by clicking one of those great looking icons below.
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