Buying real estate usually requires some pretty significant financial investment, and this is even more true with commercial properties. For most uses, you cannot take out a residential mortgage to pay for a building in which you plan to conduct business. Thus, commercial real estate loans operate as an entirely separate subset of options. The good news is that for your commercial needs, these loans often provide unique advantages. If you’re considering what kind of commercial loan is right for you, here’s what you need to know.
Types Of Commercial Real Estate Loans
Real estate can vary significantly, even between two buildings next to each other. That’s why there are a few types of commercial real estate loans for you to pick from:
- Owner occupied loans: If you plan to occupy the property that you are buying for the purpose of doing business, there is a type of loan specifically for you. The Small Business Administration (SBA) can assist with these types of loans, and you can generally find both fixed and variable options.
- Investment Loans: You need not be starting a business in order to purchase commercial property. If your eyes are set on investing instead, you may not qualify to borrow using an owner occupied loan. That’s what investment loans are for.
How Is A Commercial Loan Different From A Residential One?
Buying a piece of commercial property is functionally different from purchasing a residential home. There are different processes, and the loans that you take out for each are substantively different. Specifically:
Who Can borrow?
Residential loans are made out to individuals, but in order to secure a commercial loan, you’ll need to be a business entity. This does not necessarily need to be a business itself; you could also be a developer, trust, or fund.
How Does Amortization Work?
Amortization is the process of determining how much interest and principal are paid with each payment so that payments stay the same. In residential mortgages, amortization aligns with the payoff timeline, so you will gradually pay more in principal and less in interest over time. With a commercial loan, the amortization often stretches beyond the term.
What’s The LTV?
The LTV, or loan to value ratio, is a calculation of how much a property is worth versus how much the loan amount is. A commercial loan usually does not exceed about 80%, whereas a residential mortgage can have an LTV of up to 100%.
Your Local Community Bank Can Help You Evaluate All Your Options
If you’re considering a real estate purchase, you already have a lot to think about. The professionals at Woodsboro Bank would be happy to help make the decision about your commercial loan as easy as possible by offering personalized guidance. Reach out to ask questions or schedule an appointment to talk about your options.