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A commercial real estate loan is not the same as a home loan

On Behalf of | Sep 3, 2020 | Real Estate

Texas residents who wish to purchase commercial property may find it is more involved than buying residential. The loan itself is quite different. Here are a few things one should know before seeking a commercial real estate loan.

Difference number one: Purchase made by an entity. Residential real estate is usually purchased by an individual. Commercial real estate, however, is usually acquired by a business entity. If a business lacks a credit rating, the owner may have to guarantee the loan.

Difference number two: Loan-to-value ratio is on the lower side. Lower LTVs are less risky for lenders. Unlike residential mortgage loans, commercial property loans lack mortgage insurance. For this reason, lenders are not likely to grant a loan for more than the property is worth.

Difference number three: Shorter repayment period. With residential real estate, the amortization period and payment schedule is consistent for up to 30 years, or longer, unless one chooses to make early payments. With commercial real estate, one may have a set payment schedule for so many years, usually between five and 20, and then have to make a balloon payment to cover the rest of the loan.

Difference number four: Prepayment penalties. Home loans can often be paid off early without penalty. This is not typically the case for commercial loans. Lenders expect a certain yield on their investment. For this reason, an exit penalty for an early payoff will likely be included in loan agreement.

There are a few other ways in which a commercial loan varies from a residential loan. The overall point is, those in Texas who are looking to purchase commercial real estate need to understand these differences so they fully understand what they are locking themselves into. Before signing anything, it is wise to have an attorney review the loan documents to make sure they serve one’s best interests. Legal counsel may also be able to negotiate better terms.