Commercial Vs. Residential Loans

Most homeowners are familiar with the procedures involved in obtaining a residential loan. Lenders review the homeowner's credit scores, an appraisal is done on the property and negotiations are made considering the interest rate and terms of the loan. While these steps typically take place when obtaining a commercial loan, there are some distinct differences between the two types of loans.

Identification

Residential properties typically include single family houses, duplexes and condominiums. Commercial properties include apartment buildings, office buildings and generally any type of property used for commercial purposes. When purchasing either type of property, you must obtain a loan specific for the property type. A residential loan cannot be used to buy commercial property, and a commercial loan would not be used to buy residential property.

Types

There are different types of lenders and brokers. Some deal primarily in residential properties, others in commercial and a few with both. If you need a commercial loan your residential lender is not likely to be able to assist you, other than providing a reference for a commercial lender. Generally, finding a residential lender is easier than finding a commercial lender.

Considerations

Most commercial lenders require a much higher down payment than a residential lender. Residential loans typically range from zero down to 20 percent down. With a commercial lender, it is not unusual for them to require at least 35 percent down, if not more. A down payment is cash paid by the buyer, in addition to the loan. If purchasing a piece of property at a $100,000 sale price, 20 percent down would mean the buyer was putting down $20,000 cash and borrowing $80,000 to pay for the balance of the sale price.

Features

Not only do commercial lenders require a higher down payment, they usually charge higher interest than residential lenders loaning on the same loan amount. This means that monthly payments on a $400,000 home will typically cost less than a $400,000 commercial building, even though the actual loan amount is less, due to a higher down payment.

Time Frame

Residential home loans can have a longer term, which helps the homeowner lower the monthly payments. While many home loans are for 30 years, some residential loans are spread over a 40 or 45 year term. In commercial loans, the period is shorter and often based on the age of the property. Generally speaking: the older the commercial property, the shorter the term of the loan.

Considerations

When granting a residential loan, the lender is concerned with the buyer's credit scores, the buyer's ability to continue making monthly payments and the value of the property. While a commercial lender considers these factors, they determine the property value differently than in residential. When calculating the value of commercial property, any income the property generates is factored into the equation.