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What is the Difference between Commercial and Residential Real Estate Loans?

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What is the Difference between Commercial and Residential Real Estate Loans?

Commercial as well as residential loans have some common points to ponder on. Both kinds of loans are undertaken on properties and they both deem the property itself as collateral. But, despite having so many similarities, both the loans have their own shares of differences as well that in entails a completely different set or procedures for each loan. Here are some of the key differences between the two.

Borrowers and lenders

Unlike the residential loans that are dealt usually between the banks and the individual buyers a commercial mortgage is made to an organization. When it comes to the tax purposes, it is usually the best practice for borrowers to sign as a representative of a business entity as the property is meant solely for business purposes. Commercial loans are also at high risks than the residential loans. If the owner of a house and commercial property has difficulties regarding the finance, they will need to ensure that the home mortgage is repaid in the first place, and become delinquent on their commercial property loan often. Commercial mortgages also tend to have higher interest rates and shorter terms than the residential loans as there is a smaller secondary market size when it comes to commercial loans.

Commercial loans need business plans

A business plan is essential for credit score when you are hoping to gain a commercial loan. These loans are associated with the actual property and cash flow than the residential loans. If you are buying a commercial loan, brace yourselves to answer a plethora of background questions associated with the property. Some of these questions are as follows:

  1. Who pays the utilities?
  2. What types of maintenance are required?

Questions regarding cash flow will also be asked from you. The borrowers who take commercial mortgage should brace themselves to offer proof of business revenue, profits and detailed plans for how the commercial properties will generate sufficient money.

The terms, conditions and regulations of the loan

Residential real estate loans are financed over lengthy period of time. 30 year mortgages are the most common. Albeit, they have many options available, this is deemed ideal because of longer amortization period that helps in creating smaller monthly payments. Also, residential loans are usually amortized over the loan life, so loan is fully repaid at the end of the term.

When it comes to commercial loans, the range is usually 5 to 20 years. They are also able to customize the loan repayment schedule to specific needs. It may have some restrictions on payment which preserve the lender’s expected yield on loan. If the loan is settled before the maturity date, then you might have to pay the prepayment penalties.