Understanding the Differences Between Commercial and Residential Loans

Today, Spartan Commercial Mortgage is going to go over some of the differrences between commercial and residential mortgages. This is truly important for real estate investors to understand. Furthermore, it will help Investors to grow their business. Even more, it will allow for a smoother process in your next closing. Knowledge is Power. And, Spartan Commercial Mortgage is here to help you every step of the way.

1. Property Types

Let’s start with a basic difference between residential and commercial lending: the properties themselves!

A commercial property is generally defined as real estate that is used for business activities. In many states, residential property containing more than a certain number of units may also qualify as commercial for tax purposes.

Unlike residential homes, which can all look alike within a given neighborhood, the commercial properties located along a single city block may all appear unique and serve separate purposes.

Just think of the differences between office, warehouse, retail, and apartment properties.  They have very little in common, but each are considered to be commercial real estate. Furthermore, a single family home can be considered commercial if the title of the property is held in a LLC. The same can be said about 2-4 unit apartment homes.

2. Qualification

The old saying is true – while residential lenders focus on qualifying the borrower, commercial lenders focus on qualifying the property.

Of course, commercial lenders qualify borrowers as well, but their underwriting teams spend a significant amount of time determining the subject property’s ability to generate revenue.

This is where Debt Service Coverage Ratio (DSCR) comes into play.  DSCR is calculated by taking a property’s Net Operating Income (NOI) and dividing it by debt service (principal and interest payments).

The goal for underwriters here is to determine whether a property generates enough revenue to adequately cover the repayment of a loan. Whereas residential loans focus on the debt to income ratio of the borrower, commercial loans focus on how the property debt services.

3. Loan Term

The most common term for residential mortgages is 30 years.  However, commercial mortgages typically have term lengths of 5, 7, or 10 years.  This is primarily due to the increased risk associated with commercial loans.

As a result, commercial borrowers who want to hold on to their property must refinance their mortgage on a fairly regular basis.  This can be a good thing for originators who specialize in creating strong relationships with their clients – there is an opportunity for repeat business that doesn’t exist with residential borrowers.

Note: While some commercial borrowers welcome the flexibility that comes with short loan terms, others would rather secure a long-term solution with a fixed rate.

That’s why Spartan Commercial Mortage offers a 30-year fixed rate commercial loan.  This type of solution is rare in the small-balance commercial mortgage industry, but it meets the needs of our borrowers.

Call today for a free consultation or click here to get pre-approved.

Thanks,

Michael Meyer

President Spartan Commercial Mortgage Services 

mike@spartancommercialmortgage.com  

(860) 876-0572

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