Key Differences Between Residential And Commercial Real Estate Loans!

Real Estate Loans

Have you made up your mind to start with your new business venture? Are you finding ways to gather the required funds to buy your commercial space? If yes, you have landed at the right place!! As a new business owner, it is time for you to opt for commercial real estate loans and set up your business space. If you are confused between residential or commercial loans loan options and their terms, here is the list of prominent differences between them to clarify your donuts:

Commercial Real 

Estate Loan

Residential Real 

Estate Loan

Borrowers can get commercial real estate loans from local banks. They will analyze your commercial property and determine whether it will be able to generate profits in the future.  Borrowers can get residential real estate loans from any private lender or financial institute.
  • Interest Rates 

Commercial real estate loans come with high interest rates. This is because of the possibility of the business on the property going into loss and the borrower defaulting the loan amount. 

Commercial loans tend to have variable interest rates and can go up and down along with the market shifts. 

The interest rates of residential loans are usually lower than other loan types, especially when the loan is amortized over a shorter term.

The rate of interest of residential loans is fixed without the complete loan tenure.

  • Repayment Period

Commercial real estate loans are amortized over shorter periods. This poses less risk to the lender, and they receive higher monthly payments in the form of EMIs.

 

High EMIs sometimes make it harder to get a commercial property to retain a consistent flow of money. 

Residential real estate loans are usually for 30 years unless the borrower makes a huge down payment.

This allows the borrowers to manage their monthly expenses conveniently while paying the low EMIs of residential loans on time.

  • Down Payment 

Commercial real estate loans may require down payment higher than residential loans because of being riskier. 

Lenders usually require a 20% down payment and an 80 percent Loan-to-Value Ratio.

The down payment required in the case of residential loans is negotiable and is usually 20%.

If the borrower has a decent credit score of above 650 and the Loan-to-Value Ratio is 80%, it becomes easy to close the deal at the lowest possible down payment.

  • Eligibility

In the case of commercial loans, the money generated by commercial property and the loan type are the primary deciding factors for eligibility. The more income commercial property generates, the less important the income of the borrower becomes.   The qualifications of a residential loan highly depend on your monthly income. The more income sources or cash flow consistency, the easier it gets to avail the desired loan amount.
  • Penalties

Commercial loans have prepayment penalties due to the risk of the loan in the estimation of the lender. The residential loan can be paid off anytime within the loan tenure without any penalty.

This concludes our comparison of two of the most renowned financing options for real estate purchases. If you are looking for start-up loans for business, going for commercial real estate loans is the best option. Similarly, if you plan to rent out the real estate property, opt for residential real estate loans. 

Make wise financial moves while making an important financial decision!

 

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