When you are considering the purchase of a commercial property you will quickly learn that commercial mortgages are more expensive. Understanding the reasons will help you to see why the increased cost is necessary.
As you begin to explore your options for commercial mortgages you will find that there are more fees associated with them and the interest rates are greater than a residential mortgage. This could seem surprising at first but understanding the addition risk that lenders are facing with commercial mortgages will help you to grasp why the fees and interest rates must be higher.
The most obvious difference in the two type of mortgage is the dollar amount. The average residential loan in the United States was just over $309,000 in January of 2017 and at that same time period the average transaction for commercial mortgages was $1,100,000. So these much larger numbers represent a higher risk for the lenders. It is a greater sum of money being borrowed so the lender wants to be certain that they will be able to recover their investment if the borrower defaults. In short, lenders look at a higher loan as a higher burden of repayment and also a higher chance of default.
There is also a greater volatility associated with a commercial loan. A person gets a loan based on their income or salary. This is likely to remain very steady unless the person loses their job. And in that case, they will find another job. Also, in most cases a person’s income rarely decreases and more often than not it increases. But the same is not true for a commercial loan. The loan approval is based on the revenue of a business which is much more likely to fluctuate. A slow period, a bad quarter or a change in the economy can have a much greater impact on a business’s revenue. Because revenue is dependent on the economy more than a person’s income is, there is a greater chance that a business could default due to lack of ability to pay the mortgage.
There are also more fees associated with the process of applying for and getting a commercial loan. The amount of documentation required is much larger and therefore takes much longer to review and process. This accounts for some of the additional fees that are needed for administrative tasks. There are also more surveys and inspections required for the sale of a commercial property. The costs of these services are also passed along to the buyer of any commercial building or property.
More Processes = More Cost
As with anything, the longer it takes the more it costs. When the lender is required to complete a greater discovery process before approving a loan then the buyer should expect to pay more fees. It is also easy to understand that if a loan represents more of a risk to a lender then they will want to charge a higher interest rate for the loan. So knowing that the process is different can help a first time borrower to understand why the cost of a commercial loan is greater than the cost of a residential mortgage.
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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