Commercial Loan vs Residential Loan. What’s the best multifamily financing option from a lending standpoint?
When it comes to multifamily financing, the fundamental difference between commercial loans vs. residential loans all comes down to how many rental units you intend to borrow against. To break it down, one to four-unit investment properties can qualify for a residential loan. If a property has five or more units, you are required to apply for a commercial loan.
Let’s dive in and show you how multifamily investing works and why these are great options to add to your portfolio.
Commercial loan vs Residential Loan
Residential Loans
Residential Properties are one, two, three, or four-unit properties. Duplexes, triplexes, and smaller properties are eligible for traditional 30-year mortgages. Many borrowers prefer federally-backed loans. These loans are optimal since they typically offer money with lower interest rates. Longer-term Fannie Mae and Freddie Mac FHA loans are among the most popular options for residential real estate. These loans are typically traditional 30-year fixed-rate loans. As with all loans, you must provide tax returns, optimal credit scores, and a strong history of financial responsibility with consistent and on-time monthly payments. Underwriting will scrutinize your loan application since it is their job to vet you and your personal finances to ensure you will not default on your property loan.
Commercial loans
A commercial real estate loan is a business loan that may be used to purchase property intended for commercial use. In turn, this money may be used for the purchase of property or the development of it or construction of it. Many commercial properties are used for multifamily or for multiple businesses. If a multifamily property has five units or more, even if this property is zoned in a residential area, you will still need a commercial loan.
A Commercial loan is typically used for investment property or office buildings and is typically more lucrative than investing in single-family homes. When using a commercial mortgage, there are limitations on the size of the property and the residents of the property. In some cases, you will have to meet specific loan terms to meet the criteria of commercial lenders.
For example, if you don’t plan on living in the property, your down payment requirement can be upwards of 25%. Owner-occupied multifamily properties offer substantial financial benefits, especially if you can find a property in a desirable area. Real estate investing with multifamily properties has profound economic benefits. When considering the type of loan you need and what loan programs are available, key differences exist based on property size.
Banks
Most large banks or community banks offer commercial loans. These loans often come with a 25-year term. Many investors use these loans for shorter-term funding to upgrade existing rental properties, get new appraisals, and refinance. With the new property appraisal, they stand to gain a substantial return on the original investment.
Commercial loans often have higher interest rates than traditional government-backed loans. As a borrower for a commercial loan, the banking institution is basically betting on you. The relationship you have with your mortgage lender is transactional. They will qualify you for this loan based on your credit history and credit score, your track record of financial responsibility, and your credibility. The partnership you create with your bank and lender is one of the most important aspects of becoming an investor. You want them to be familiar with you; the relationship will ensure that you both make money, reciprocate additional loans, and grow together.
Common lending terms and funding options
DSCR Loans
DSCR Loans: As with all loans, you must show proof of financial responsibility and adequate loan-to-value ratio. To ensure a property is a sound investment, you will want to check the debt-service coverage ratio (DSCR). This ratio compares the net operating income of the purchased property to its annual mortgage debt. Most lenders want your DSCR to be 1.25 or higher.
Amortized Loans and Balloon payments
With a traditional loan, the loan amortization schedule balances throughout the life of the loan, and when you make your last payment, your loan is paid in full. With Aoritized lending, the loan amortization period usually isn’t balanced. Accountants using amortized loans help balance their cash flow over extended periods. These loans are beneficial if you plan to keep the property long-term. Since you will be paying off a specified principal amount in each mortgage payment, this increases long-term equity. Keep in mind; there will be a balloon payment due at the end of the loan.
You will need a business entity for your commercial loan: Business owners worldwide understand the importance of choosing the right type of business entity for lending and borrowing. In a nutshell, this structure will set up how much you will be personally liable for and how much the business will be responsible for. It is advised to speak to a professional and set your entity up to fit your specific needs.
SBA Loans
Take advantage of a Small Business Administration Loan (SBA loan): If you plan on living in your multi-family unit, you can take advantage of an SBA Loan. Please remember that these loans are only eligible for owner-occupied property.
Bridge Loans
Bridge Loans: These short-term loans are meant to bridge the financing gap or allow a developer to develop property before reselling it.
Prepayment penalties: Lenders know that they make their money through interest. Consequently, they want you to make every monthly payment possible. So be prepared for a penalty if you end up paying them off prematurely.
When deciding to use a commercial loan vs residential loan, the best option is always to educate yourself and prepare as much as possible. Once you are comfortable with your prospects, find a real estate agent to guide you, and research lenders until you find your perfect fit.
What’s best for you, a Commercial loan vs Residential Loan? Mortgage Insiders can help you decide.
Your home plays a significant role in financial security. So, regarding your mortgage loan, you want to be sure you’re making responsible decisions. Undoubtedly, the loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
You deserve to work with a lender who brings clarity and has your best interest at heart. Whether you are looking to purchase a home, help with refinancing, lower interest rates, or specifically ensure that you have made the best decision for the life of your loan, Mortgage Insiders can help you after helping thousands of families reach their goals to create stronger financial futures.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
