Commercial vs. Residential Loan: What You Need to Know

There are many different types of loans available for business purposes, and it can be difficult to choose the right one for your needs. Two of the most popular options are residential and commercial loans. These loans are designed to help borrowers pass difficult times without losing their business or property. Each type of loan has its own unique benefits and drawbacks, so it’s important to carefully consider your options before making a decision. Want to learn more about these loans? Read further to get an overview of residential loan vs commercial loan to understand their key differences. 

What is a Commercial Loan?

Commercial loans are typically used to finance major capital expenditures or cover operational costs that the business may otherwise be unable to afford. Unlike consumer loans, which are typically repaid in fixed monthly installments, commercial loans often come with variable repayment terms based on the cash flow of the borrower’s business. As such, commercial loans are generally riskier than consumer loans and typically carry higher interest rates.  

Since commercial loans are short-term loans, they can be unsecured and secured. Businesses can apply for a loan through any financial institution that offers these types of services, such as hard money lenders or banks. There are a few terms and conditions that you need to meet before you get the money. 

What is a Residential Loan?

Residential loans can be used to purchase primary residences, secondary residences, or investment properties. Common types of residential loans include fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans. 

It is a basic loan, similar to the one people get on their primary residence. The key difference between them is that borrower needs to put more money into it. In general, you need to put 20-25% on an investment property while it may take only 3% to take an FHA loan on a primary residence. Residential loans also have higher interest rates. 

A borrower can get a loan for up to 30 years, but you can also opt for shorter-term loans like 15-year loans. When you apply for this type of loan, you need proof that you can afford to pay debt later. Like personal loans, you need to submit your personal financial documents for income and identity verification.

Commercial loan vs Residential Loan

Both commercial and residential loans may look similar to you. Well, they are not. Both loan types are used for different purposes and have different application procedures. Let’s go through the commercial vs residential loan difference you need to know. 

Source

Sourcing residential loans are much easier than commercial loans. You can get a residential loan from pretty much any national mortgage lender or a major bank. Contrary, business owners can only get commercial loans from the local banks. So, whatever city you are planning to develop your business in, you need to build good relations with the local banks. 

Amortization Period

This means the length of the loan. Residential loans usually have a 15 or 30 years term. But commercial loans have short terms. While a shorter loan may not look feasible for you, it has a lesser risk for the lender, as they get higher payments every month and get the entire debt in just a few years. 

Interest Rates

Commercial loans have much higher interest rates than residential loans. However, interest rates greatly depend on the term of the policy, the financial institute you choose, your credit score, and other factors. So, even residential loans can sometimes get higher due to your financial condition. 

Down Payment

When you opt for residential loans, you need to pay 20-25% of the loan as a down payment. But based on the amount of money you have chosen and your financial condition, you may need to put down more money for commercial loans. This more happens when you don’t have excellent banking relations with your local bank. Therefore, expert suggests building a relationship with the banks as soon as you start to plan for the business. 

Variable Vs. Fixed

Analyzing the difference between commercial loan and residential loan, it is important to mention that residential loans have fixed interest rates throughout the loan term. When you get a loan, you will lock on a specific rate. So, whatever happens to economic conditions or bank financial status, you have to pay the same amount. When it comes to commercial loans, you need to pay variable rates. This means your interest can rise or drop along with the index, as your interest rate is linked to the standard index. On top of that, you don’t have any choice, and you have to pay for higher interest rates if the index gets high. 

Qualification

Your qualification greatly matters whether you apply for a residential or commercial loan. In the case of residential loans, the banks will verify your salary to ensure you can pay back the money. Commercial loans, on the other hand, are more about a property. The financial institution will only offer you money if your property generates a good amount of money to pay the debt. The more revenue your business generates, the less likely your personal monthly or yearly income matters. 

How to Invest with Lending Bee

Here at Lending Bee, we understand that sometimes traditional lenders can be hesitant to approve loans, especially for those with less-than-perfect credit. With a hard money loan from Lending Bee, you can get the funding you need without having to worry about extremely high interest rates. We will primarily look at the value of the property rather than business revenue or your income. 

Here are a few benefits of investing in real estate with Lending Bee:

• Quick closing time
• No minimum credit requirement
• No need to prove your personal income
• Best customer experience and support guaranteed
• Up to $25M of the loan amount

With years of experience in the industry, we’re committed to helping our clients get the financial assistance they need. Contact us today to learn more about our hard money loans and how we can help you!

Conclusion

When you’re in the market for a loan, it’s important to understand the difference between commercial and residential loans. 

Lending Bee is a great option for anyone who needs a loan. We offer a variety of loans, including both commercial loan vs residential one. We’re committed to providing our customers with the best possible service with our competitive rates and flexible repayment terms. And we’re here to help you every step of the way. Contact Lending Bee today to learn more about our loan options.