What Is the Difference Between a Commercial Mortgage Loan to a Regular One?

There are many different loan types that are suitable for addressing a range of different borrowing activities. Two popular options include mortgage loans and commercial loans. A regular mortgage, also known as a conventional mortgage, is a traditional home loan without the backing of a government agency such as the Federal Housing Administration (FHA), the USDA Rural Housing Service, or the US Department of Veterans Affairs (VA).

Conversely, a commercial mortgage, also referred to as a commercial real estate loan is a loan taken to finance, acquire or redevelop commercial property. The commercial property may include an industrial warehouse, office building, or shopping center which acts as collateral.

When To Take A Regular Mortgage Loan

People with an excellent credit score between 680 to over 700 are eligible for a regular mortgage loan. Better yet, a higher credit score will qualify borrowers for lower interest and those who score over 740 often access the best terms.

When applying for a regular mortgage loan, the borrower needs to have an acceptable debt-to-income ratio. This ratio calculates the total sum of a person’s monthly expenses compared to the monthly income. To qualify for a conventional mortgage, the ratio should lie between 36% and 43%.

The borrower generally needs to make a down payment of 20% of the total value of the home and in cases a person cannot cover the down payment amount upfront, lenders might require a private mortgage insurance policy. Consequently, they can then pay the premiums on a monthly basis until they achieve 20% equity in the house.

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When to take a commercial mortgage loan

Banks, insurance companies, private investors, pension funds and independent lenders all offer commercial mortgage loans. The loans are suited for businesses, corporations, and investors who operate or own commercial real estate.

Before underwriting and issuing the loan, lenders will check the creditworthiness of the business or borrower as well as the nature of the collateral. Furthermore, the lender will also consider the debt-service coverage ratio and the loan-to-value ratio. Additionally, lenders will likely analyze the financial statements and income tax returns for the last three to five years to assure a high likelihood of repayment.

The Takeaways

Mortgage and commercial loans ultimately serve very different purposes. While both can be used to accumulate property, one is for residential purposes while the other is specifically for bridge loan commercial real estate purposes.

Nevertheless, certain qualifications like repayment history, credit score, and more, are relevant for each loan type, making it imperative for the borrower to have the strongest qualifications possible when seeking the best rates and loan terms.

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