The Differences Between a Commercial Mortgage and a Residential Mortgage

If you have ever wondered what the differences are between commercial mortgage and residential mortgage then here are some of the most obvious differences that you will find when trying to obtain a commercial loan.Loan AmountsThe most obvious difference is that conventional loans are about $417,000 and Jumbo Loans usually go from $417,000 up to $2,000,000. Commercial mortgages can go into the 10′s of millions. A $5,000,000 commercial mortgage is very common.Higher Down Payment RequirementsWhen you buy a single family residence you may put down as little as 3.5% with a Government backed Loan. Commercial Loans require that you have at least 25% to put as a down payment. Down payment requirement may be higher if the property is not in the best condition.Debt Ratio versus Debt Service Coverage RatioA single family mortgage requires you to qualify with a debt to income ratio or a percentage of your gross monthly income to qualify. A commercial loan use Debt Service Coverage Ratio. Unlike a home loan a commercial loan allows you to use the monthly income you gain to qualify. The D.S.C.R. is the total monthly income that a commercial property earns divided by the monthly mortgage payment.Example: An apartment building earns $6000 per month and the mortgage payment is $3800. If you divide the two you get $6000 / $3800 = 1.57 D.S.C.R.Lender requirements vary but most lenders will require D.S.C.R of 1.25 or higher to qualify.Higher Closing CostsOne of the most obvious differences is that you will spend more money in closing costs. One example is the property appraisal. While most residential appraisals can run around $350 an appraisal for an apartment building can run from $2500 to $5500 and this can vary significantly from one type of property to another. In addition each lender may require additional reports that can vary from $50 to $5000.Payment TermsResidential Loans have term that vary from variable rate loans to 30 or 40 year fixed rates. Commercial loans are limited to balloon loans with variable rates. A balloon loan is amortized like a traditional loan but must be paid back in a few years. For instance a loan will be fixed at 5% interest rate for five years then at the end of the five years adjust to current interest rates. The balloon feature may require you to pay off or refinance the loan at the end of 5, 10, 15 years. It is very unlikely that you will find a 30 year fixed rate commercial mortgage and if you do the rate may be significantly higher than a 5 year balloon loan.Rates Based on Property QualityA lot of lenders will base your final interest rate on the quality of the property being finance. So a property in good condition will get a competitive interest rate while a poorly maintained property may end up with a rate as much as 2.0 basis points higher.DocumentationResidential mortgage loans usually require proof of income and credit reports. Commercial Mortgages require much mores such as:rent Rolls, profit and loss statements, operating statements.

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