Wednesday, May 9, 2007

Commercial property, investment property, residential property loans: What's the difference?

There are different classes of loans to consider when one needs to obtain a mortgage to finance the purchase of income property. Commercial loans are underwritten differently from residential loans, and the interest rates, fees, appraisals, terms and prepayment penalties also are in a different league.

Residential loans are the everyday mortgages people obtain for their homes. They are available for 1-4 units, whether or not the owner/buyer plans to live there. If the buyer does not plan to inhabit the premises, the loan will be classified "non-owner occupied", and there will be an upfront fee plus possibly some restrictions on loan to value ratios and other guidelines. If the buyer plans to inhabit one of the units, then some of the guidelines and fees may be relaxed. However, whether 1-4 unit property is owner occupied or non-owner occupied (strictly investment), the loan process and general parameters are similar.

If a property exceeds 4 units, is mixed-use or strictly for business or any type of non-residential purpose, then a commercial mortgage is required. Lenders generally demand a higher down payment for this type of loan, and the appraisal must go into much greater depth regarding the value and income potential. The appraisals for small commercial properties cost several times what one pays for a residential mortgage, and lenders base much of their approval decision on the appraisal.

What may come as a surprise to many people is that some small commercial loans are available as "stated income" (meaning the lender doesn't verify the income amount you state on your loan application) and even "no doc" (the lender does not ask for any statement or documentation about income, employment or assets).

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