In most cases, a residential mortgage is extended to individual borrowers, or a couple, but a commercial mortgage loan is often made to a business entity such as a corporation or a partnership. Commercial mortgages can also be granted to funds and trusts which are created specifically to own commercial properties. The most important concept to consider about this business entity is that it might not have any tangible credit history. So often times, it is the members of the trust, principles of the corporation or owners of the business who must guarantee the loan. In order to do this they are required to use their credit score and history to prove their creditworthiness to qualify the business for the loan. If the lender does not require a personal guarantee then property foreclosure is the only means of recourse in the event of default on the loan. In this case it is referred to as a non-recourse loan.
The repayment schedule for commercial real estate loans can also be very different from residential loan schedules. A home mortgage is most often financed for 30 years but there are options for terms as short as 15 years. But the payments are amortized over the life of the loan so that when the final scheduled payment is made, the loan and interest are paid in full. With a commercial mortgage the term can be five years or less and rarely extend as long as 20 years. Also, the amortization period is normally longer than the loan term. This results in a balloon payment being due at the end of the loan for the remaining balance. This payment cycle can and often does result in a very large payment coming due at the end of the loan.
In most cases, borrowers are not able to save or acquire enough cash to pay the final payment on a commercial mortgage. As a result they are forced to refinance the property to cover the final payment. This can work in the borrower’s favor if interest rates have dropped but it can also work against them if the business’s financial situation has dramatically changed. If there is less cash flow or they have acquired a greater debt load then the risk of default could be higher and the lender will increase the interest rate. But even a higher interest rate is better than defaulting and the loss of the property.
As with any loan, the lender is looking at creditworthiness and the ability to repay the money that you are borrowing. But understanding that a commercial mortgage is a greater risk for the lender will help you to justify the more in depth credit requirements and the compressed term of most loans. Knowing these facts will help you to determine if you can qualify for a commercial loan and if you can afford the terms of repayment.
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
Technorati Tags: commercial mortgages,commercial loans,commercial lender,commercial hard money lenders texas,commercial mortgage Texas,commercial loan Texas,commercial mortgage Arizona,commercial loan Arizona