How Is A Commercial Real Estate Loan Different?
Are you familiar with the mortgage process from when you bought your previous home, and are you now ready to buy a commercial building for your business? If so, know that these two types of loans are very different in regard to how they are handled by the bank. Here are a few key ways that these two types of loans are different.
The Purpose
The purpose of a commercial real estate loan is to buy some sort of property that is in a space zoned for commercial use. This includes retail centers, office buildings, industrial areas, and things of that nature. A home mortgage can only be used to purchase and refinance homes, which have a very limited use.
The Loan Size
In the home mortgage space, you have conventional loans that define all mortgages below a certain value that meet the terms and conditions defined by the government. There are also jumbo loans for those homes that are high value and outside the scope of a conventional loan.
Commercial spaces do not have this differentiation between buildings based on the price since it's simply called a commercial real estate loan. This is because the cost of a commercial building is usually so expensive that there is no need to classify a commercial building as a separate jumbo loan.
The Terms
Used to being offered a 30-year mortgage from when you bought a home? That will not always be the case for a commercial real estate loan. These loans for business are often shorter than traditional mortgages due to the risk that is involved and are typically between 5 to 10 years. Even though commercial properties are more expensive, the lender will likely not extend the loan for a lengthier period of time to bring down monthly payments.
The Interest Rates
Since businesses fail at a faster rate than home mortgages do, commercial real estate loans are considered a riskier investment for a lender. That is why you'll see that interest rates will be higher for a commercial real estate loan when compared to a mortgage. The lender is simply trying to limit their risk and get more back on their money during those first few years of the commercial loan.
The Down Payment
You can also expect the down payment for a commercial real estate loan to be higher than a mortgage. It is common for lenders to accept at least 25% of the property's value as a down payment, which can be quite a bit of money when you consider the higher cost of the property. However, it can get as low as 10% when using a small business loan.
Contact a company like CSA Capital to learn more.
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