Commercial Mortgages
Commercial mortgages are loans used to finance the purchase or refinancing of commercial properties – properties used for business purposes rather than residential purposes. Key differences between commercial and residential mortgages include:
Image by vectorjuice on FreepikProperty Types: Commercial mortgages are used for various types of non-residential properties, including office buildings, retail centers, industrial facilities, multifamily properties, hotels, and more. The property's income-generating potential and market value are important factors in determining loan eligibility and terms.
Loan-to-Value (LTV) Ratio: Lenders assess the loan amount relative to the property's appraised value to determine the loan-to-value ratio. Commercial mortgages typically require a lower LTV ratio compared to residential mortgages, often ranging from 60% to 80%. This means borrowers must provide a higher down payment or equity in the property.
Debt-Service-Coverage Ratio (DSCR): An extremely common criteria in commercial mortgages, not often seen in residential mortgages is the DSCR. This is the ratio between Net Operating Income to mortgage payments (Principal + Interest). Lenders typically like to see a minimum DSCR of 1.3 when assessing commercial property.
Underwriting Criteria: Commercial mortgages involve a thorough underwriting process where lenders assess various factors, including the property's cash flow and income potential, the borrower's creditworthiness, financial statements, business plan, and market conditions. The property's net operating income (NOI) is an important consideration to ensure it can generate sufficient income to cover the mortgage payments.
Commercial Mortgage Rates: Interest rates for commercial mortgages can vary based on factors such as market conditions, property type, borrower qualifications, and loan terms. Commercial mortgage rates are typically higher than residential mortgage rates due to the increased risk associated with commercial properties.