A commercial loan, also referred to as a commercial real estate loan, is a financing product designed specifically for the purposes of purchasing new or existing commercial properties or renovating commercial space. While residential mortgages are typically made to individual borrowers, commercial real estate loans are often made to business entities. The gamut includes office buildings, retail space for lease, warehouse, hotels, land, and multifamily housing.
While the mortgage process for commercial loans is similar to that of conventional loans, there are a few key differences. Because a commercial loan is considered riskier than a residential mortgage, lenders typically require an LTV (Loan-to-Value) of around 75% to 80% for this type of investment, whereas homebuyers can qualify with an LTV as high as 97%.
Another difference is that a down payment on a home mortgage is negotiable and sometimes can be waived altogether, whereas for commercial loans lenders require a down payment usually in the ballpark of 20%. In another scenario, lenders may instead use the debt service coverage ratio (DSCR) to measure the ability of borrowers to pay their financial obligations with their existing cash flow.
But the differences do not end there. Unlike residential loans, the terms of commercial loans typically range from 5 to 20 years. The amortization period is often longer than the term of the loan. For example, an investor might get a loan with a term of 10 years and an amortization period of 30. The investor would then make smaller payments equating to the amount of a 30-year loan over the 10 years followed by a lump-sum payment of the remaining balance. Lastly, commercial loan terms usually include a prepayment penalty or yield maintenance fee structure in the event of an early payoff.
Are you interested in a commercial loan? Call us today and we will be happy to discuss in more detail how to set you up with an investment property loan that will fit your growth needs