The Differences between residential and commercial real estate loan terms

Commercial real estate loan terms differ in some important ways from residential loan terms. This is because commercial properties are financed by groups, come with different payment schedules and have different property valuations.

A major difference between the two types of mortgages is who actually takes out the loan. Residential mortgages are almost always made to individuals. Commercial mortgages on the other hand are usually lent to entities like corporations, trusts or similar groups. The groups themselves may or may not have an established financial history. A commercial lender will therefore look closely at the finances of the groups individual owners and may require them to individually pledge their personal property as collateral before any loan is approved. This is known as recourse, or secured loan. With residential mortgages the value of the home is usually enough in terms of collateral and the bank only considers the credit history of individual borrowers.

A traditional residential mortgage is often amortized. This entails the borrower making fixed payments over the course of the loan which goes toward both the loan interest and the principle. This means most residential mortgages are paid in full once the loan matures. Commercial mortgages usually entail balloon payments were a borrower makes monthly payments for a period of time. However once the loan expires the borrower must repay the remaining loan balance in full. Commercial mortgages also usually come with pre-payment penalties built in. A simple prepayment penalty entails the borrower repaying the outstanding loan balance multiplied by a given number. There are also interest guarantees, where the lender is entitled to a certain amount of interest even if the principle is paid off in full. Some commercial mortgages may simply have lock out periods, in which the borrower can’t make any extra payments towards the loans principle for a given period. Since the recession, very few residential mortgages are structured around balloon payments and very few come with pre-payment penalties.

Commercial real estate loan terms for commercial properties, are evaluated based on a debt service coverage ratio.

A debt service coverage ratio (DSCR) is the amount of income a property generates when compared to the owners debt obligations. Such a calculation does not apply to residential mortgages, as residential properties don't generate income (however a residential borrower’s income may be compared with their outstanding debts). For example if a property generates 140,000 in income annually and the outstanding mortgage is for 100,000 dollars then the DSCR is 1.4. A DSCR helps lenders evaluate how much debt a commercial borrower can carry. A DSCR less than 1 indicates that the property doesn't generate enough revenue to meet outstanding mortgage obligations. Lenders usually require commercial properties to have a DSCR of at least 1.25 before any mortgage can be approved.

Commercial mortgages are usually made for a smaller share of the properties current value

Something all lenders consider is the value of a loan compared the value of the property being financed; this figure is known as an LTV. This indicates how much equity an owner has at stake in the property being financed and in the case of residential and commercial mortgages the lower and LTV the better. Due to government programs some residential borrowers can qualify for mortgages approaching 100 percent of their properties market value. Commercial borrowers very rarely get loans exceeding 80 percent of a properties market value. This means commercial mortgages usually come with significant down payments.

In summary, the terms of a commercial mortgage are different because borrowers are usually groups of investors. Commercial mortgages often come with balloon payments and pre-payment penalties which are uncommon among residential mortgages. Commercial properties are also valued differently and this greatly impacts the terms of a commercial mortgages and how much money a borrower can receive.

Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Breaking Down Commercial Real Estate Loan Terms

For those entering into the world of commercial real estate, understanding the many loans and commercial real estate loan terms that various entities provide can be confusing. From traditional banks to hard money lenders, institutions and private lenders offer varying terms that can range to as little as 3 months to 20 years or more.

There are several different options a company or individual has when trying to secure funds for a commercial project. Some investors lend on specific types of projects, such as only multifamily units, while others will lend on any and all types of businesses and developments from retail to hospitality to office space to industrial. Commercial real estate loan terms on the various lenders vary dramatically. A SBA loan, for instance, usually offers terms in the 10 to 20-year range. They are hard to obtain and time to funding can take several months. With a traditional commercial mortgage, you will typically find terms that range from 5 to 20 years. Time to funding is usually over one month and they require a high credit score. A bridge loan is a short-term asset-to-asset based loan that usually tops out at about 12 months, though terms can often be extended. Commercial mortgage-backed security (CMBS) loans fall in the 10-year range at which point the debt matures and refinancing is required.

If this is your first foray into commercial real estate, it’s important to note that commercial real estate loan terms are dramatically different from residential loans. A residential mortgage typically is an amortized loan with a debt repaid in regular installments. These fall in the range of 15 to 30- year mortgages. At the end of the period, the loan is paid off.

Commercial loans, on the other hand, can offer terms that are anywhere from 3 months to 20 years. The amortization period is usually longer than the term of the loan resulting in a balloon payment at the end of the term. For example, a borrower may obtain a commercial loan for a term of five years with an amortization period of 20 years. They would then make payments for five years in a monthly amount that would actually pay it off in 20 years. At the end of the five-year term a balloon payment would be due which would pay off the loan in full. The terms and amortization period will usually affect the rate that the borrower receives.

Typical Terms for Hard Money Lenders

Because hard money lenders usually fall in the private sector, these lenders can offer more flexibility. Commercial real estate loan terms usually fall somewhere between 1 to 3-years and are considered short-term loans. Because they can fund in as little as a week, they are often used when capital is needed in a short time, such as when a prime piece of property comes on the market and investors are trying to beat out their competitors by getting a bid in quickly and with no contingencies.

Terms for commercial hard money loans usually range anywhere from one to three years.

At Level 4 Funding, we offer a wide variety of loan programs from bridge loans with terms that start at 3 months to construction loans with monthly draws and terms of two years. Other loan options provide terms as high as five years. Approval occurs in as little as 24 hours with funding provided in less than a week. Call us today for a no-obligation quote.

Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Commercial Real Estate Loan Terms

If you are trying to decide between various loans from different lenders, there are bound to be different terms to compare. When deciding what loan is going to be the best for you, understanding commercial real estate loan terms will help you plan far into the future.

Understanding the various conditions of your real estate loan will not only alleviate a lot of the stress of planning for repayment and usage of your loan, but it will also help you choose the options that are going to be the best for your specific real estate needs. While each loan is going to have unique factors and terms, there are some basic things to understand about commercial real estate loan terms.

The first thing to understand is that the condition of the borrower will greatly impact the terms of the loan. This is especially true for more traditional lenders. As a general rule, if the borrower presents a higher level of risk to the lender, then the commercial real estate loan terms will be much more in the interest of the lender. Such issues could be less than stellar credit, or not much collateral to bring to the table to secure the loan. It only makes sense. Lenders want to make sure that the terms are in their favor so that they are able to gather some sort of return on their investment with the loan. A lack of any sort of record for the repayment of outstanding debt could also affect the terms, as lenders do not know what to expect from potential borrowers, in this case.

Another aspect of commercial real estate loan terms that can greatly impact a borrower and future plans is the length of the loan itself. While there are many options for extremely short terms loans that are designed for flipping properties or quick influxes of cash to generate massive returns on revenue, the majority of loans are geared toward longer lengths, although not as long as a residential mortgage. Usually they can be as short as 5 years and as long as 30, but they typically fall in the 10 to 20-year range. But the key to understanding your loan here is to understand how it is amortized.

Unlike residential loans, many commercial real estate loan terms will state an amortization period of longer than the actual repayment term of the loan. Typically, a commercial loan will have a standard payment period for the first portion of the loan and then end with a large payment that will take care of the balance of the loan, often called a balloon payment. Let’s say, for example, that your loan is for 10 years, but is amortized over a term of 20 years. This means that you will make payments for 10 years as if you were going to be holding the loan for 20 years (in terms of the interest and amortization). However, after the 10-year term is up, you will be responsible for the entire remaining balance in one payment.

How are commercial real estate loan terms beneficial to borrowers?

Even though they might seem daunting, commercial real estate loan terms allow borrowers to take leaps that they would not otherwise be able to. If used correctly, these loans will help borrowers to acquire properties and turn them into income generating investments.

Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage