The difference between residential and commercial
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Residential and commercial loans are similar in many ways. However, there are some major differences in the uses for commercial loans, and the way that you qualify for them as opposed to residential loans.The major difference between the residential mortgage and commercial mortgage is the required minimum down payment that the borrower needs to make. Since there is a higher risk for a commercial mortgage, the lender usually want to see some equity to be paid down by the borrower.
Commercial mortgages in general have higher interest rates and shorter terms than residential mortgages. This is due to the fact that there is a significantly smaller secondary market for commercial loans, whereas Fannie Mae and Freddie Mac would purchase any conforming residential mortgages from banks. Knowing that they can recoup their capital investments by selling their mortgage loans on the secondary market, banks are more willing to offer competitive interest rates on residential loans.
Commercial does have its advantages. If scouted properly, a commercial property can yield a larger profit then residential. Take for example a mixed use property (1 store front and two residential apartments). The rent from the store front could potentially account for your entire mortgage payment while the rent from the two separate apartments are all profit. Many savvy investors will tell you commercial investing is the way to go.
It is common for a commercial loan to have a balloon payment at the end.
Commercial loans are generally relatively short term, and are refinanced regularly so that owners can pull out profits from their investment tax free as loan proceeds.
Commercial loans are riskier than residential loans. If someone who owns a residence and commercial property has financial difficulties, they will make sure their home mortgage is paid first and often become delinquent on their commercial property mortgage.
Commercial loans are most concerned with the actual property and cash flow than residential loans. If you are shopping for a commercial loan, be prepared to answer alot of questions regarding the property such as who pays utilities, what types of maintenance is required, and other questions regarding cash flow. Many lenders require pictures of the property before considering lending on it.