Thursday, January 27, 2011

Difference Between Residential and Commercial Mortgage Loans





Difference Between Residential and Commercial Mortgage Loans

Understanding commercial mortgage loans is an important element of business success. When creating a business plan or deciding to expand a business, companies need to consider location. Where is the best place to operate? How much square footage is needed? Should we lease a space or purchase the building outright? If your company is looking at the first time purchase of a building for your business than there are certain differences residential and commercial loans.

The obvious difference between these two types of mortgage loans is that a residential mortgage loan is for a single family dwelling while a loan is for an office building, manufacturing plant, or shopping center. Commercial mortgage loans can also be for an apartment building or multifamily dwelling. In addition a loan is usually taken out by a business, whether it is a sole proprietor, a partnership or a corporation, instead of an individual or married couple. The less obvious differences, however, are important to your business.

Commercial mortgage loans, unlike residential mortgages, can be nonrecourse. Nonrecourse means that if a business defaults on their mortgage, the lender can take the real estate used as collateral in an attempt to recoup its losses but has no recourse against the company itself. This is why many commercial mortgages have a supplemental general obligation clause, where the company that takes out the loan has to pay the lender the difference between what is owed on the mortgage and the funds recouped from selling the property. This obligation clause can sometimes even remain in effect if the company files bankruptcy.

The life of a loan taken out on business real estate is not as long as a residential mortgage. Instead of 20-30 years, a commercial mortgage standard is 3-15 years with a balloon payment (large payment) due at the end of the loan. So when businesses are comparing mortgage rates, the length of the loan and the size of the balloon payment are important considerations in addition to interest rates and amortization.

Commercial mortgage loans have different criteria for approval. While lenders look at business plans and revenue forecasts, their main concern is usually debt service coverage ratio, or the net income the property produces over the total appraised value of the property. Therefore, when determining if a company should purchase a property outright, they should consider the length of the loan, the amount of the payment due at the end of the loan and if the revenue generated by the property will cover the mortgage payment.

Article Source: http://EzineArticles.com/?expert=Claire_Geonzon

3 comments:

small business loans said...

This post is awesome..i've been reading tons of crap posts from other blogs, but shows you have a more educated reader base.

kevin smith said...

I am planning to buy a small house in Nashville looking for an experienced agent, who can help me in finding an affordable one. Please suggest me where can I find an expert who can help me in this regard.

Mortgage Nashville

obama loan modification california said...

By now you know that Loan Modification and Refinancing are achieved through lowering the interest rate on a mortgage.

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