Residential vs Commercial Loans?

From “Ask Kit!”:

Q: What is the difference between a residental and commercial loan?

A: Generally residential loans have a 30 year loan term, with at “today’s” rates, and you put 20% of the purchase price down (you can put less down but then you have to buy mortgage insurance which costs money up front and each month). If you go the non-qualifying route (this loan has several names, including no- documentation and low-documentation) you’d have a higher interest rate and probably put 30% down. You can also get adjustable rate mortgages which means that your interest rate is quite low initially and after a stated number of years (1-5 years is typical) the rate adjusts annually, going up or down 1-2 points (depending on the program) with whatever indicator it’s tied to.

Commercial loans can be moderately competitive with residential interest rates or can be outlandishly higher. I’ve heard of interest rates at 14%! Given the low rate these days that’s close to highway robbery, in my humble opinion. ;~) Commercial lenders don’t have to subscribe to the same rules of disclosure as residential lenders and because of one bad interaction with a commercial lender I’m biased against them — even knowing that sometimes that’s the best or only way to go. The term is much shorter, 20-25 years typically. The down payment is higher2 30-40%, typically.

And the interest rate can be fixed for 20 years, or adjust monthly.

2 thoughts on “Residential vs Commercial Loans?”

  1. Kit,
    I agree with most of what you have to say about residential except down payments. Although the residential arena is not my specialty, down payments for residential loans are available with 15-5% down, with some special circumstances of just closing costs (maybe 3%).
    However, Commercial loans are my area of expertise. There are many commercial loans available depending on property type. (Apartment buildings 5 units and above, Office buildings, Professional tenants with long term 10 to 25 year leases., etc.) Many of these income producing properties qualify for as little as 10% down.
    There are certain property types that the property itself qualifies for the loan. All the borrower needs is there 10% down and 3% closing costs.Very Happy
    Anyone wanting to discuss this further may do so by contacting me at the following:
    Financial Consultant

  2. You bet there are loans “available” with low down payments, in both residential and commercial. In residential lending if less than 20% is put down then mortgage insurance is required, raising the monthly cost. In commercial lending, I now know *one* innkeeper who has applied for and gotten one of those 5% down loans (and I know lots who have applied).
    Just because loans are available with little money down doesn’t make it the right thing to do. The monthly loan payment is the highest expense an innkeeper has, and the least flexible terms. If business slows or stops for any reason, or if the innkeeper can’t work for any reason, the loan still must be paid. Many other expenses often go down as business slows, but not the loan.
    I used to say “where there’s a will there’s a way”, but I don’t any more. After watching too many successful inns and innkeepers struggle, starting in 2001 with the recession and then 9/11, some able to hang on and others not, I am much more cautious in my advice. I now make the bold, ugly statement that if you don’t have 30% down plus closing , moving, and marketing costs, and a 6-12 month cushion, you don’t have enough money to be an innkeeper.
    Now that advice is for people who want the inn to be their primary business and a viable concern. That advice doesn’t apply to those who are using the inn as a retirement hobby.
    B&B real estate isn’t the same as residential or other commercial real estate where you want to leverage your money. It’s a blend of the two investments and lifestyles so can’t use the same logic when looking at loans.
    Chauncy, I have heard statements like yours for many years and appreciate that enthusiasm and positive attitude. I have seen very few lenders follow through with a loan. The loan is dependent on both the inn and the buyer, and most lenders don’t understand the business well enough to evaluate the inn. Most lenders are scared of B&Bs because they are an unknown, so it’s easier to say “no” than “yes”. If you can help buyers then power to you and bless you.
    Thanks for chatting about this. I’d love to hear input from buyyers on their experiences in getting loans for the B&Bs.

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