Comparing Commercial and Residential Mortgages
While there are many features of real estate mortgages that look similar between commercial and residential properties, there are a lot of hidden differences to commercial mortgages, in addition to some of the more obvious ones. Still, both provide buyers with an opportunity to invest in property with a controlled and sustainable payment schedule spread over years. Beyond that, they have more differences than similarities. Here is what you should know if you are shopping for commercial real estate.
LTV and Interest Rates
Commercial mortgages tend to have a lower LTV than personal loans, and how low depends on the kind of mortgage sought. Banks have the most stringent requirements and highest LTV offerings. Frequently, but not always, they also offer the lowest rates to those they qualify, but qualifying is not easy for new investors or those with recent portfolio setbacks. Alternative lenders cost a little more and offer slightly lower LTV ratios, but they are more accessible and the costs can be controlled by using more valuable commercial real estate collateral than you need.
Determination Criteria
Personal mortgages are generally given based on the value of the property, the income of the buyer, and that buyer’s credit rating. Businesses and commercial real estate investors will find that income and credit score are not enough, the financial health of one’s entire investment portfolio needs to be evaulated. They also find that most often, it’s the income of the building and not its market value that is used to determine the size of an avaiable loan. It is estimated within market capacities for the building’s resale, but the most important aspect of commercial mortgages is often the building’s ability to pay for itself.
Income Verification and Applications
Commercial mortgages for investment properties require income verification just like personal ones, both for the building you’re financing and for your entire portfolio, to show your business is above water. Applications also frequently look at the investor’s personal credit score in addition to any business credit score held by corporations or LLCs that investor works through, so be ready to have either or both reviewed. Beyond that, the application requirements vary. Many commercial real estate lenders are less interested in a business plan that estimates growth than they are with whether the building’s existing income can support the loan.
If you have any additional questions about commercial mortgages or real estate loan alternatives, it’s a good idea to talk to a loan agent for more details about a lender. It’s also a good idea to shop lenders for your best offer before you sign.
