Most people assume that all mortgages are basically the same. But there are some very key differences between residential loans and commercial real estate loans.

Many business owners assume that when they are ready to buy a commercial property, the process will be much like when they applied for a personal home loan. The fact that it is a loan used to purchase property is the same but there are a few important differences that you need to fully understand before you begin to search for and apply for commercial real estate loans. The process is more in-depth and requires more documentation than a standard home loan. Knowing the process will help you to manage your expectations and be successful when seeking your loan.

The first difference is that your business entity might not have a financial history that is long enough to secure a loan. If that is the case then the lender is going to require the owners of the business to guarantee the loan. This is the lenders way of ensuring that there will be someone to repay the loan if the business fails or is unable to make the loan payments. If this is the case that your business is facing then you should be prepared to submit all of your personal financial records along with your business financials to the lender. If there are multiple business owners then each one should submit their personal documents. This can include historical tax documents, bank statements and an over view of any investment portfolios that the principals own personally.

The repayment schedule for commercial real estate loans can also be very different from personal mortgage payment schedules. A home loan is amortized, meaning that the debt is repaid over regular installment payments. The longer the loan is the lower the monthly payment but the higher the interest and the loan can range from 15 years to 30. A commercial loan is normally from 5 years to 20 years and the amortization period can be longer than the loan term. This means that the borrower is often faced with a final payment due at the end of the loan term. This is called a balloon payment and can often be quite substantial. Borrows most often must refinance the loan to pay the balloon payment on the initial commercial loan.

The Cost of Commercial Loans Can Be Very Different

Commercial loans represent a greater risk to the lender than a standard personal mortgage loan. Businesses are more at the mercy of the economy than consumers so there is a greater risk of defaulting on the loan. For this reason, lenders charge a higher interest rate on commercial loans. In addition there can be many additional fees that the borrower must pay. There can be an origination fee, legal fees, appraisal fees and even some annual fees that are paid for the life of the loan.

Do Your Homework and Be Prepared

Understanding the differences between your home mortgage and a loan for a commercial property is very important. It allows you to create realistic expectations for the process, it helps you in grasping the time frame that is required for the approval process and helps in understanding your full commitment to the loan.