Are there key differences between commercial and residential loans? If you’re new to the world of commercial lending, you may be surprised to learn how different securing a commercial loan is from securing a residential loan. Even if you’re a seasoned homebuyer, you’ll have plenty of new territories to navigate on the commercial side. Let’s discuss some of the main differences between commercial lending and residential lending processes and practices.

Loan Types

The term “residential loan” refers to loans that are provided to finance the purchase of single-family homes, townhouses, condos, or multi-family residences (for four or fewer families). That’s pretty much it. While there are certainly different loan subtypes, such as balloon mortgages, reverse mortgages, ARMs, et cetera, they’re all associated with the home types listed above. Commercial loans, on the other hand, can refer to any number of loans that serve business entities, such as:

  • equipment loans
  • building loans
  • commercial lines of credit
  • construction loans
  • franchise loans
  • hard money loans
  • SBA loans
  • startup loans
  • acquisition loans
  • refinancing/cash-out loans

The list above is just a handful of the types of loans that are financed by the commercial lending industry. While there are many types of loans, there are a lot of similarities among all commercial loans, as explained below.

Terms, more differences between commercial and residential loans

In general, residential loans come with more favorable terms, such as no prepay penalties, lower interest rates, longer rate locks, and longer amortization schedules. Closing costs are generally lower, and, unless you’re paying points in exchange for a lower interest rate, there are not usually loan origination charges associated with residential loans.

However, home mortgages are also much more inflexible than commercial loans. Most residential loans in the U.S. are backed by the government, so they must be structured in a very specific way. Commercial loans allow for much more flexibility because the government doesn’t give their stamp of approval on them. Instead, committees that are part of the lending banks themselves are the ones who decide whether to approve a loan. Because of this, we are free to design a truly customized loan that meets your precise needs.

Who’s Qualifying

If you’ve ever taken out a residential mortgage, you know that it’s you (and any co-borrowers) who must personally qualify for the loan. A lender will scrutinize your credit history, all sources of income, and financial obligations. You’ll need to fit specific criteria regarding debt-to-income ratios and credit scores.

However, when you apply for a commercial loan, it’s not you that the bank looks at so much as the business itself. That means that if you’re planning to purchase an apartment building or strip mall, the bank will carefully consider whether the property you have in mind can sustain itself in the event you default. Is there enough rental income to cover the monthly cost of the loan? Unlike with a residential mortgage, where a lender will want to see that your income just matches your monthly loan repayment amount, with a commercial loan, the bank will want to see that the income covers your costs PLUS an extra 25%.

What This Means for You

Understanding the differences between commercial and residential loans may help you. For example, if you are taking out a loan with a $1,000/monthly payment, the lender will want to see that the building you’re purchasing can bring in $1,250 per month. While this concept is the most straightforward when considering a loan for a building purchase, it also holds true for other types of commercial loans. The bank will look closely at what you want to purchase and, essentially, decide if it’s a viable, sustainable investment. They want to ensure that what you want to purchase will produce sufficient cash flow to make it a wise course of action.

Of course, a bank will still consider your personal income situation to some degree, especially if this is a new business venture for you. however, in general, the property that’s being funded is of principal importance to any prospective commercial lender.

The Villa Nova Difference

At Villa Nova Financing Group, we know that there are differences between commercial and residential loans because we work with over 200 commercial lenders to secure you the money you need to start, build, and expand your business or real estate investment. While commercial loans can be notoriously difficult to obtain, we are here to make it as straightforward and painless as possible. Rather than rushing you through the process, we put a great deal of energy into understanding your commercial venture so we can custom design a loan that ensures the most favorable outcome for you—and the future of your business. Give us a call today to ask us any questions you might have or get the ball rolling on your commercial loan.

Get answers to your questions

We invite you to speak with one of our commercial or residential mortgage experts about your financial and lifestyle goals. This no-obligation consultation can be held over the phone or in our Warren, NJ, office.

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