A loan in which real estate is used as collateral - a guarantee that the loan will be repaid and on time - is usually called a commercial mortgage. While it is much like a residential mortgage, the difference is simply that the collateral and the building purchased with the mortgage is used for commercial rather than residential purposes.
A loan would be considered a commercial mortgage if, for instance, an entrepreneur were moving from his home office to a storefront retail, office or warehouse location due to the growth of her business.
If, however, she simply wanted to expand her home office by another few feet and needed a mortgage loan to do so that loan would probably be considered a residential rather than commercial mortgage.
Another difference between a commercial mortgage and a residential mortgage is how the financial institution looks at the ability to pay the loan. The okay for a residential mortgage, as well as the rate, are determined by the borrowers financial situation - her or his credit history, and current ability to repay the debt.
When considering a commercial mortgage, however, a lender would look at the value and quality of the property being purchased by way of that commercial mortgage, and its ability to bring in revenue.
Rental property in a market that is glutted would be looked on less favorably even when the borrower has sterling credit than a mortgage for commercial rental property in a town that has a scarcity of rentals and people moving in all the time.
Even if the borrower had less than perfect or even some bad credit, he or she would be favored over that person with perfect credit in the town that doesnt bode well for full rental occupancy.
Commercial mortgage loans are charged a considerably higher rate of interest than are residential mortgage loans. These are nearly always fixed rate loans, however, which means that that borrower pays the same interest rate throughout the life of the loan.
There are some capped or variable rate commercial mortgage loans, but theyre not in the majority.
If you are an experienced home owner and mortgage borrower that is just setting out to secure a commercial mortgage for the first time you may be unpleasantly by how much more complicated and time consuming the commercial mortgage process is than its residential counterpart.
That is because the legislated guidelines require lenders to rely on the propertys stability and income history as a means of determining its potential for future profit. It is only after this revenue potential has been determined to be promising that the credit history, financial strength and assets of the commercial borrower are even looked at.
The commercial mortgage application is extensive enough that youll probably benefit from working with a commercial mortgage broker. Youll probably have to provide financial history about the property and your own situation for the last two years.
The format in which this information must be provided is generally quite strict and an experienced and knowledgeable mortgage broker will get you past these commercial mortgage hurdles and on your way to a great fixed or variable rate commercial property mortgage.
James Copper is a commercial mortgage consultant for Commercial Finance Specialists.