Commercial real estate loans are known as an income-producing property that can be used only for the businesses and is not meant for any personal or residential projects. You can apply for commercial loans for real estate to build a commercial property like shopping malls, retail shops, office buildings, and complexes, etc. Commercial loans for real estate are secured by a lien on commercial property. Whereas residential loans are for the personal housing properties. There is a huge difference between these two types of loans. in this article, we will explain to you the differences between commercial loans for real estate and other residential mortgage loans.
Differences between Commercial Real Estate Loans and Residential Mortgage Loans:
Borrowers: Residential mortgage loans are specially designed for individual borrowers, and business entities cannot avail of such home loans. On the other part, commercial loans for real estate are completely made for business entities. Corporations, limited companies, funding agencies, trusts, proprietorships, partnerships, and other business entities can apply for such loans.
Income: For residential loans, the debt cannot be more than 45% of the total income. Hence, in this case, the lender will compare your total income & total debts to calculate your total loan amount. Whereas in case of commercial loans for real estate, the lender will consider the income that the property will generate and will compare it to a debt you owe or loan you need. It is known as a DCR or coverage ratio.
EMI structure or term of payment: Residential mortgage loans can be provided with long term repayment tenure and borrowers can choose 20 to 30 years to repay their loan. In the case of the term loan, you need to pay low EMIs with high interest. But, in the case of commercial loans for real estate, borrowers can choose 7 years repayment structure with 30 years amortization period. In this case, borrowers need to pay small EMIs for seven years and they can make the final payment at the end of the tenure. The final payment is called balloon payment which can be made after 30 years only for commercial loans.
The interest rate for commercial loans for real estate: Interest rates on commercial loans are normally higher than residential loans. For commercial loans, you need to pay several fees like an appraisal, legal fees, loan processing charges, survey fees, loan origination charges and lots more. Even you need to pay some fees before the loan is approved. Your loan can be rejected after paying such fees and these charges are non-refundable. Apart from that, you need to pay foreclosing charges, and if you want to foreclose your loan before the tenure then you need to pay an additional amount.
How would you choose the best Commercial Loans for Real Estate?
To apply for commercial loans, you need to check your credit history, if you have a poor credit score then you cannot avail such loan. Apart from that, you need to submit various documents to avail such loans including your business proof, financial statements, project details and lots more.
In this regard, you can search such commercial loans for real estate online and check the rate of interest offered by different lenders. Then you can compare their charges and choose the best one for your upcoming commercial project. It is a wide decision to take commercial loans for new real estate projects, especially when you are developing a commercial office or housing complex because your customers can avail of the mortgage loan to buy your property from the same bank by submitting fewer documents.