Commercial vs. Residential Mortgages

When most of us think of mortgages, residential mortgages are usually what first comes to mind. We think of fixed-rate/adjustable rate mortgages, home loans, and refinancing programs which deal primarily with home ownership and personal property purchases.

Yet, for business owners out there – and even some individual buyers with specific needs - there are many commercial mortgage options available which are worth examining. Commercial mortgages are readily available to those people who have done their homework and can provide statistical data that shows the purchase is a good business move. However, not all home mortgage lenders also make business property loans.

What differentiates a commercial mortgage from a residential mortgage?

Commercial mortgage loans differ from residential mortgages primarily because they're used to finance commercial property. The property may technically even be a residence (many people work from home and maintain a proper office there, for example), but if it is used as a commercial venture, a commercial real estate loan is generally required. The volume of commercial loans grew 16 percent in 2005 to $1.3 trillion, as lenders provided business loans for various ventures, developments, investments, and construction projects.

Business owners can actually be presented with the some of the same choices of mortgages as a residential borrower. It is still important to look around and make comparisons for the best interest rate and terms, and then decide if you should commit to a fixed rate loan, an adjustable rate mortgage, or some sort of hybrid that encompasses terms indicative of both types of mortgages. They may also want to look into small business financing options, which may save thousands in interest over the course of the mortgage term.

While discussing residential purchases, we generally are referring to single-family houses, duplexes, townhouses, or condominiums. However, the term 'commercial property' describes a much broader property description, including high-rise office buildings, apartment buildings, hospitals, retail shops, service stations, etc. In other words, by definition, commercial property is used for the purpose of making money rather than as simply a means of shelter. This is important to understand because the qualification factors for a commercial mortgage are based largely on the earning potential of the property. One of first things the lender would want to know is the cost of the building versus the net income potential.

A commercial mortgage borrower needs to also consider the terms of the note and how they affect the management of the property. For example, a lender may set forth terms that define the condition the property must be kept in, leasing restrictions, and penalties for an early payoff of the principal balance. Such terms and requirements are, of course, often very different for commercial properties than residential so it's important to take this, and all of the other considerations, into account.