The Difference Between Residential and Commercial Real Estate Loans

There are a lot of similarities between mortgages for the purchase of a personal residence and traditional commercial real estate loans, but it’s the differences that are important for new investors to understand. While both loan types might offer long loan terms and stable fixed rates with amortizing payments, they have very different processes for approval, as well as different loan criteria. Preparing for the enhanced complexity of commercial real estate loan applications is the best way to glide through approval easily, so let’s talk about those differences.

Loan Criteria and Financial Disclosures

If you’ve ever purchased a home, you know residential mortgages require your personal credit report as well as disclosure of your personal finances. That includes both financial assets like savings and investments as well as evidence of your income in the form of pay stubs or tax returns. All of those factors are also considered when you apply for a commercial property loan, but there are a few more financial factors at play. Your portfolio value is a major one because the equity in other properties represents a set of financial assets you can tap into if cash flow tightens.

For investors who do business through a company to better structure their personal and business finances separately, a business credit report for the company is also going to be required. Whether you’re working as an independent investor or structuring your investments as a business, you will probably be required to submit a business plan with financial projections in addition to the other materials required. You’ll also probably find the lender requires a higher down payment for commercial real estate than you find in residential mortgages.

Building an Investment Business Plan

Real estate developers with a traditional business structure that includes employees or contractors will find the business plan they need to build is fairly traditional. Income from selling improved properties and renting long-term holdings, cash reserves, key players in the business, all of it. That includes financial projections that take into account the overhead costs of your portfolio and the income you are likely to realize based on existing lease and purchase agreements. Those who act as independent investors without setting up a company will also be asked to create a business plan that takes all of these factors into account, but some lenders may have additional requirements that reflect the structure of your investment. One example would be the addition of a section on successfully completed projects for independent commercial real estate flippers.

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