Before you apply for a commercial or residential mortgage loan, you should be aware of the options available to you. Naturally, commercial mortgages are for businesses while residential mortgages are for homes. However, there are certain distinctions between them that you understand. Aside from the obvious, namely the type of property being financed, here are the 3 main differences between commercial and residential property mortgages to be aware of.
Differences Between Commercial and Residential Property
Amount of risk involved – the main factor that separates commercial from residential mortgages is the fact that commercial mortgages are riskier than residential ones. This is because residential mortgage lenders ask about your income in order to ensure that you’ll have the finances necessary to make your monthly payments. Consequently, your monthly payments can only equal a maximum of 28% of your gross income. With commercial mortgages, your property’s income is used to pay back your mortgage loan. Therefore, the lender is more concerned about whether your business will be successful rather than knowing the amount of your annual salary. Thus, the lenders are more cautious as they have to take a higher risk.
Size of your down payment – repayment of your mortgage loan can be affected in a number of different ways based on the amount of risk that’s involved. For example, you can usually negotiate the size of your down payment for a home mortgage with lenders whereas they will be much stricter when it comes to a down payment on a commercial mortgage. Furthermore, they will typically require a higher down payment percentage – usually 20% – for commercial mortgages. However, in rare situations, the lender may allow the borrower to put only 10% down.
Timeframe for repayment – because there is less risk associated with residential mortgages, it increases the borrower’s down payment flexibility. Repayment terms can range from 15 years to 50 years. While you may be able to negotiate the repayment term on a commercial mortgage, you will usually have 10 years (on average) to repay a commercial mortgage. Additionally, you can usually make advance payments on a residential mortgage if you want, whereas with a commercial mortgage, you may be penalized for making your payments too soon.
Buying a Home in Denver CO
Whether you’re searching for a commercial mortgage for your investment property or a residential mortgage for that new home, Front Range Mortgage can assist you in finding the right lender for your specific needs. If you have any questions or would like more information about a commercial or residential mortgage, call us today, or at your earliest convenience, at (303) 500-1900. Our experts are available to take your call and walk you through the process.