The Difference Between Residential and Commercial Real Estate Financing

Getting ready to buy a building for your business? It’s exciting, but it’s also a really sensitive time for a small business owner, especially if you have never purchased commercial real estate before. Residential purchases for either home or recreational property are treated very differently from business purchases, and the lending industry provides far fewer options for financing, so choosing the right one is simpler for homeowners than business owners. If you’re buying a new house to live in, you’re generally only having to pull together your own financials, maybe that of another buyer if you’re unmarried and purchasing with a friend or partner. Your earnings and your credit are really all that matter other than the property’s condition and valuation.

If you’re getting a business loan for a commercial property, the factors the lender weighs are far different. It’s still important to have a good income and credit score, but the income and score that matter most are those of the company, not your personal scores. At the same time, poor personal credit is also an issue, because lenders frequently look at the personal financial resources of the business owner. If you are part of a partnership, your own score can be less of an issue, but it will still matter if you’re on the loan paperwork as a partner. Your company’s financial projections and reserves are also considered as separate parts of the income package, because businesses don’t generally have a guarantee of income. If your company is different because you have long-term contracts, a solid business plan in your application package can make commercial real estate easier to finance.

Commercial loans might be structured a lot like residential mortgages in many cases, but the LTV and terms are quite different in most programs. Sometimes this makes the interest rate a little lower than residential mortgages, but the two markets move differently enough that it’s hard to make a fast generalization for all market conditions. It’s not even accurate to say they resemble mortgages, either. Traditional loans do, but they are only a plurality of the loans out there. Many other loan forms exist, including stated income loans that allow you to value a building by its earning capacity and not its purchase price, or bridge loans designed to provide access to ownership while you rehabilitate a property. Understanding these tools and applying for the right commercial loan is just as important as meeting the requirements lenders impose to check on your company’s financial health if you’re going to get the best possible ROI from your purchase.

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