The rise of the U.S. mortgage market occurred between 1949 and the turn of the 20th century, and different types of home loans are now the conventional method for people to purchase homes and commercial property.
Perhaps you have applied for a home mortgage and are now seeking a loan for the property that houses your new business or company. If you think you’ve mastered the mortgage process and are prepared for round two, think again. The commercial mortgage process is a completely different beast, and can be very complicated.
Unlike residential mortgages, commercial mortgages are not backed by the government, as with entities like Fannie Mae. This means that direct mortgage lenders are twice as likely to be risk averse since the responsibility of the loan is on them. The consequence is that interest rates are much higher than with residential loans. Some lenders will even take it to the extreme by asking for the borrower’s business as collateral in addition to the property in which the business will be housed.
Another thing you should know if you are planning on taking out a commercial mortgage is that the loan will need to be repaid much earlier than its stated due date This is because the bank will require most of its loans to include a balloon repayment, meaning that the borrower will pay interest and principal for the first few years of the mortgage, and then the entire balance in one balloon payment.
Since most borrowers won’t be able to save enough in such a short time, they normally re-qualify for their commercial mortgages or refinance at the end of the balloon term. The major disadvantage of this system is that if the business owner had cash flow problems during the preceding years, he or she may be presented with higher interest rates or get the loan denied altogether.
Of course, in addition to a business mortgage, owners and investors must consider other costs, like the expenses from a business loan and unanticipated start-up costs. This is why it is very important to lock in a rate as soon as you are comfortable with the numbers after you have compared mortgages.
As with residential mortgages, it is still important to maintain a good credit score (many lenders require a minimum credit score of 680), and to have enough for a down payment, which can typically be 3.5% of the home’s cost.
Don’t forget to compare different types of mortgages and commercial mortgages to find out which is right for your business.