Most people are familiar with how residential mortgages work. Did you know that commercial real estate loans are similar in some ways? They are an excellent way for a business to level up or expand. However, there are several significant differences, too. Commercial real estate loans generally have a shorter term. They aren’t offered only at banks; insurance companies and the Small Business Administration also offer CRE loans.
Commercial real estate loans are different, in essence, because they are extended to a business, not a person. When most people seek their first mortgage, they generally have a credit history. Before qualifying for a mortgage, they need proof of income. For businesses, it’s different. The marketplace is harsh, and sales can fluctuate at any time. An income stream is not as certain with a company as it is with a person. Businesses in an expansion phase also typically have a shorter credit history than a person would.
Commercial real estate loans are like mortgages for a property that will only be used for business functions. Down payments are generally 20 to 30 percent. CRE loans are typically secured by liens on the property. Liens give the issuer of the loan the ability to seize the property back if payments are missed on the loan. Liens are important insurance for lenders, against the risk of missed payments.
Another difference between residential and commercial mortgages is the term. Residential mortgages typically have a long term, around 25 or 30 years. Residential mortgage loans are amortized, with small payments over a long term. Commercial loan terms are shorter, usually five years to less than 20 years. The loan may also be amortized for longer than the term of the loan. So, for example, a five-year loan may have five years of small payments, with one large balloon payment due at the end.
It’s essential to never take out a balloon mortgage without knowing the money is available for the large payment at the end of the loan. Standard amortized loans are also available for commercial real estate. It’s a good idea to check in with several commercial lenders before selecting a loan. Interest rates, loan structure, and fees can all differ significantly from lender to lender.