Commercial Mortgage
A commercial mortgage is a mortgage that is secured against a piece of real estate. Unlike a residential mortgage, however, the piece of real estate is a commercial building rather than a home. A commercial mortgage can be more difficult to obtain, as the rate of default is typically much higher for non owner-occupied buildings. Provided here is a beginner's guide to commercial mortgages.
Structure of a Commercial Mortgage
A commercial mortgage is generally structured in such a way as to make the
payments add up to the total loan cost, with interest, in a fixed number of
years (often 20 or 30). However, the loan term is generally much shorter,
perhaps 10 years. At the end of the loan term, the borrower must either
make a large balloon payment or refinance the loan. The loan is referred to
by the term length/amortization period. Therefore, a loan with a 10 year
term but a 30 year amortization is referred to as a 10/30 loan.
Application and Approval
Although there are exceptions, commercial mortgage lenders generally
provide mortgages to businesses rather than individuals. Consequently,
commercial mortgage applications and the subsequent approval process are
largely designed for businesses. The mortgage may be structured in such a
way that the business owner is personally liable for a loan default, but
more commonly responsibility is limited to the foreclosure of the
property.
The business owner is generally required to have a good personal credit score and make a significant down payment (from either personal or business funds). The business must be demonstrably stable and profitable. Often, financial records and future projections for the company must be presented.
Terms
A commercial mortgage typically carries a higher interest rate than that
of a comparable residential mortgage, reflecting the higher rate of
default. A commercial mortgage is generally made for 55%-70% of the total
value of the property, necessitating that the business owner pay 30%-45% as
a down payment. The terms of a commercial mortgage may be highly
individualized, depending on the type of company that is making the
purchase and the expected use of the commercial property.
The Bottom Line
A commercial mortgage is typically more costly and harder to obtain than a
residential mortgage. The process of obtaining the mortgage can be complex,
so the advice of a financial professional is always recommended. However,
commercial mortgages tend to feature fixed interest rates and easy to
follow terms, providing a stable source of funding for commercial real
estate ventures.
