Commercial Property Loans: The difference between residential and commercial mortgages

Commercial Property Loans: The difference between residential and commercial mortgages

Most commercial property loans today are made by commercial banks. A property is only considered a “commercial property” if it is other than a condo, a duplex, a triplex, or even a fourplex. Surprisingly, it doesn’t matter whether the property in question is if it’s owner-occupied. For instance, a loan on a non-owner-occupied duplex is still considered a residential loan because Fannie Mae and Freddie Mac will buy loans secured by non-owner-occupied duplexes.

Because commercial property loans cannot be sold to Fannie Mae or Freddie Mac, they are fairly illiquid assets. In other words, if a lender gives a commercial property loan on a building, the lender is pretty much stuck with that loan in its portfolio for the entire term of the loan. If the lender all of a sudden needs liquidity to meet higher than expected withdrawals, a bank cannot easily sell off an office building loan for cash.

As a result of this illiquidity, commercial property loans are typically a little more expensive than normal mortgage loans. How much more expensive? Their usually around 0.75% to 1.50% higher. Therefore it is not to your advantage as a borrower to have your property classified as commercial property. However, interest rates on every form of mortgage loans today are at 30-year lows, so even commercial property loans today are priced at deliciously low rates. Nevertheless, residential completely differ from the standards of commercial mortgage rates.

Commercial property loans include apartment building of 5+ units, office buildings, strip centers, shopping centers, industrial buildings and warehouses, restaurants, bars, special use properties, and even raw land.

A loan on a five-unit apartment building will usually come from a commercial property lender, even though such a property is more precisely known as a multi-family property or a residential income property. In other words, all multi-dwelling loans are considered to be commercial property loans, but not all commercial property loans are multi-dwelling loans. Commercial property loans are the larger set.

What if the property consists of a single apartment unit over a storefront? Is this a residential property or a commercial property? After all, there is only one living unit. This kind of property is known as a mixed use property. A mixed use property is considered to be commercial, and you would need a commercial real estate lender to get a loan on such a property.”

Commercial property loans are just one form of commercial financing. Other forms of commercial financing include accounts receivable financing, inventory loans, equipment loans, asset-backed lines of credit and unsecured business loans.

Throughout the world of commercial real estate finance you will see the term, “commercial”. Commercial is just another word for “company”. You will also see the term, “commercial lender”. A commercial bank is just a garden variety bank that is in the business of accepting deposits and making loans, as opposed to an investment bank or a merchant bank (a very rare kind of bank that actually invests in companies and ventures as opposed to making loans).

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