When considering mortgages, residential property owners often assume that the same rules apply to commercial properties, but this is not the case. Financing for commercial properties operates under different guidelines, often involving different lenders and criteria. This article explores the key differences between residential and commercial mortgages.
Residential vs Commercial Mortgages
One main distinction is that, for commercial mortgages, lenders generally do not consider the borrower’s personal income as a determining factor. Instead, they evaluate the income the property itself is expected to generate, ensuring it can cover the loan repayments. However, lenders will still assess factors like the property’s age, condition, location, intended purpose, and suitability for your business plan. Additionally, while personal income is not a primary concern, lenders prefer that borrowers have other income sources to cover payments if property income falls short.
Processing Times
Commercial mortgage applications often require up to six weeks for processing, much longer than the few weeks typical for residential mortgages. For this reason, buyers should avoid including financing contingencies of less than four weeks in their purchase offers unless paying with cash. It is unusual for a deal to be processed any faster than this.
Down Payments
Commercial properties usually require higher down payments than residential ones. Lenders may fund up to 75% of multi-family, office, or retail properties but generally provide only about 65% for industrial or warehouse spaces.
Interest Rates
Interest rates for commercial mortgages tend to be higher than for residential ones, as lenders perceive commercial properties to carry a greater risk of default.
Additional Costs
The costs associated with obtaining a commercial mortgage are generally higher due to extra requirements. For example, lenders may require environmental and building condition reports, which can add several thousand dollars in fees. The lengthier process, partially due to these additional reports, can further extend the timeline for approval.
If using a broker for a commercial mortgage, borrowers should expect to pay a fee, unlike residential mortgages where brokers are often compensated by the lender. Finally, legal fees are the borrower’s responsibility for commercial mortgage transactions.
