The article discusses the differences between commercial versus residential loans and when is the appropriate time to use them.
A residential loan is a type of mortgage that is used to finance residential real estate. Like other types of loans, residential mortgages are debt obligations. Residential mortgages come in two primary forms: fixed-rate and adjustable-rate loans.
The fixed-rate residential mortgage has an interest rate fixed through the life of the loan. In contrast, the adjustable-rate residential mortgage has an interest rate that fluctuates with market conditions but can be fixed at specific points during its lifetime.
The Difference Between A Commercial And Residential Loan
A commercial loan would usually be used to purchase land for commercial purposes or to build a building or complex on that land for commercial use or business purposes, including retail shops, office buildings, warehouses, restaurants, bars, nightclubs, residential living spaces over commercial businesses (commonly referred to as “loft-style” apartments), condominiums, and multi-family residential buildings.
On the other hand, residential loans are used to purchase residential real estate or housing for personal use, including single-family homes, townhomes, and condos.
Why Do Custom Builders Need A Residential Loan And Not A Commercial?
Any commercial construction project is considered risky since many things can go wrong in its development course. This increases the chance of defaulting on the loan, which could put the bank at risk of losing money if it does not sell or lease out these properties or if it has to lower its value to avoid losses. Banks typically charge higher interest rates on residential loans versus commercial ones to counter this.
When residential properties are used for residential purposes, they do not require the same degree of security as those that are used for commercial purposes. Residential borrowers can usually convince their bank to issue them residential mortgages by offering additional collateral against defaulting on the loan (e.g., another piece of residential real estate). Commercial borrows have a more challenging time since other collateral is often considered insufficient if the loan amount is large enough.
Do You Need A Commercial Loan If You’re Going To Live Above Your Business?
Many small business owners purchase residential housing above or next door to their place of work because it gives them better access to their businesses and allows them to live closer to their customers.
If a residential property owner decides to turn their home into a business through a zoning variance, the residential mortgage lender would typically require that the borrower immediately pay off the residential loan and get a commercial one from that point on.
Additionally, residential mortgages often involve additional parties such as attorneys and appraisers who might need direction during processing. Commercial mortgages do not require these extras since professional developers typically build commercial real estate who know how to handle all the red tape involved.
How Do Banks Handle Residential Loans Versus Commercial Loans?
Commercial mortgages are typically less risky for banks because they are based on income-generating property, whereas residential mortgages are not.
Commercial mortgages generally require using a property to generate revenue, although residential mortgages allow the borrower to use the property for personal purposes.
With that being said, residential properties can be used as collateral for commercial mortgages if mixed with other residential properties or have an application process to separate them from potential retail tenants.
For example, custom builders may turn their homes into offices and operate out of them for three years before turning them into commercial buildings. The residential loan acts like a rental, but if the residential owner tries to sell their home in that period (or they stop using it as an office), the commercial lender can come in and take back their property.
In Summary, Understanding Your Loan Type
Are you looking for a custom home builder who is able to work with you and your lender? Contact McCalls Home Builders today to learn more about our neighborhood plans. It’s not just your future home you’re building; it’s your community.