Residential Versus Commercial Mortgage Loans

Last Updated 6/11/2015

How are residential and commercial mortgage loans different?

Recent changes in the mortgage industry have altered how many lenders classify themselves, and the loans they are eager to make. Many individuals can be confused by this and miss out on great financing possibilities. In the past many borrowers, including experienced real estate investors have sold themselves short by buying into common misconceptions about the differences between residential and commercial mortgage loan applications and underwriting processes.

So how are they really different today? Which type of mortgage loan and lender is right for you, and what should be expected from the process?

New Residential Applications for Commercial Mortgage Lenders

Following the turmoil of the financial crisis, ensuing regulatory restrictions, and uncertainty over the risk of making new loans to home buyers many lenders transitioned to classifying themselves as commercial mortgage lenders, and new ones being established have frequently preferred this label too.

The main reasons for this has been the reduced risk, and broader spectrum of possibilities in making mortgage loans on other than owner occupied property. However, just because these institutions have been labeled as ‘commercial lenders’ doesn’t mean they don’t loan on residential property.

They provide a variety of loans for entire portfolios of single family rental homes, individual investment property mortgage loans for fixing and flipping houses, and in some cases may lend to wealthy home buyers holding title through LLCs or trusts for privacy and asset protection when purchasing high end luxury residences. Some residential lenders will allow the latter too.

How Residential and Commercial Mortgages are Different

The biggest question most borrowers have is how the mortgage loan application and underwriting process is different with commercial lenders. Most will be pleasantly surprised that is isn’t as complicated as they fear. But it is different.

The most significant difference is how these lenders process loan requests. In contrast to the typically personal financial inquisitions and forms of conventional residential lenders, commercial lenders normally look for an executive summary upfront, and then make an expedited decision subject to due diligence.

Valuation and appraisals are also notably different. However, both residential and true commercial income properties are typically both appraised based upon their income potential and track record versus comparable sales. Expect environmental inspection reports to be requested as well.

Notable commercial investment property mortgage features to look out for include:

  • Non-recourse financing options
  • More complex pre-payment penalties
  • Different indexes and terms used for ARM adjustments
  • Potential for altering loan parameters after closing (i.e. extensions, increasing loan amounts, etc.)

In summary; while investment property mortgages can sometimes be more expensive with commercial lenders, or involve upfront fees, they can actually be easier to obtain than many have realized. Take a look at both solutions when considering making significant or high volume acquisitions, and choose the best fit for you.