Commercial Loans vs. Residential Mortgages: Night And Day


A major distinction between the residential and commercial real estate business sectors are in the markets and methods of financing.  The use of buildings as collateral to borrow money is what drives both industries, but similarities between the finance of commercial and residential real estate more or less end right there.  Residential practitioners considering commercial deals would do well to educate themselves deeply on the particulars of CRE finance before jumping in.  Naturally, NAR and NAR Affiliate education offerings abound for this.

But just to keep it on a conversational level: what are the biggest differences between the two?

Terminology And Contexts

Residential practitioners use a wide range of financial terms that have no parallel in commercial real estate.  There’s no such thing as a commercial HELOC, nor “stated-income” loans. But a look at terminologies between commercial and residential shows that residential’s particular jargon is very limited in comparison to that in commercial.  This is because residential real estate is very narrowly defined, and commercial spans everything residential doesn’t.

Fannie Mae defines residential properties as single-family homes and multifamily dwellings of four or fewer units.  That leaves literally every other kind of real estate out of the residential classification and by default in the enormous and complex definition of commercial property.   If it’s not residential, it’s commercial.   Land, industrial, income-producing, non-income-producing,  retail, office, you name it. There are hundreds of different types of commercial property.

Lenders For Every Property Type

Commercial presents a far greater degree of specialization in capital sources than residential.  For as many kinds of commercial property that exist, there exist lenders and terms tailored to that type of property.

Take retail. Consider how many significantly different shades of retail spaces exist: there are strip centers (not anchored by a grocery), neighborhood shopping centers, big-box power centers, shadowed anchored centers, high-end specialty, and more.

Capital sources for each type of retail present different financing propositions, because the cash flows that the properties create are all different and all critical to the lender’s profitability on the loan.  Interest rates tend to be lower for anchored properties, higher for strip-type shopping centers.  Compared to residential, commercial property lending goes for depth rather than breadth: hardly a bank is in business that doesn’t do home loans, but many lenders just don’t have the background to do some kinds of commercial loans.

The Landlord

The understanding of cash flow for a business and the building of future expectations against that understanding  is something a lender needs in order to lend to a business.  And it’s also the same reason lenders prefer not to lend to businesses, but to landlords who lease their properties to businesses.  Commercial property is far easier to analyze and is much more predictable to lenders than the business of commercial tenants is.

In residential real estate, where there is no actor comparable to the commercial property landlord, lenders focus on creditworthiness of homeowner-borrowers (and, to disastrous effect a few years ago, sometimes focus on things other than creditworthiness).   While not without its own risks, the residential financing side of the real estate business enjoys a limited set of decision factors compared to the commercial side.

(Photo credit: Tax Credits)


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  • Kent

    September 8, 2014

    I am considering to purchase a 2-family home. The 2-family home has 3-4 Bedrooms on the 1st and 2nd floor. Is the 2-family considered a residential or commercial loan? Do they just a (2-family) multi family dwelling as 2-units or based on the bedroom units? I would assume a 2-family is considered a 2-unit dwelling therefore is a residential mortgage. I know the mortgage rates are obviously different for commercial and residential based on various factors including risk . Please clarify if a 2-family would be considered a residential or commercial mortgage.

    My contact information is [email protected]

  • Navigating the intricacies of commercial mortgages is best done with the aid of a qualified commercial broker. A professional commercial mortgage broker will optimize for the best deals, in the shortest amount of time, ensuring you don’t miss a penny.

  • Pingback: Residential Mortgage Vs Commercial Mortgages | Last Mortgage

  • A

    May 5, 2017

    Commercial is definitely specialized. There are hard money lenders for both commercial and residential but with commercial from what I have seen business projections tend to come into play in regards of approval as well. If you have a business partner who has less than impressive credit it could effect your chances as well. An SBA 504 loan is a common way that many small businesses purchase commercial real estate but like a typical SBA loan the qualifications for approval can be quite high such as more than 2 years in business, a credit score over 650+ (and those are just the bare essentials.

  • Bernard Clyde

    May 22, 2017

    You make a good point that commercial loans span a much wider area than residential loans do since there so many more diverse uses for commercial real estate. It’s important to understand how commercial loans work depending on the types of loan with some of these more unique cases. That way, you will be able to understand how to come up with a viable plan in how to pay off the loan over time while growing and expanding your business.

  • lamtosang

    October 18, 2017

    Nice article I’m thinking the same to get Commercial Loan Rates And start a new business. I really appreciate it for sharing as this article is very helpful 🙂


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