The Difference Between Commercial Mortgages And Private Mortgages

Both commercial and personal mortgages can be facilitated by a financial institution or a private entity, however, there are several key differences

. Personal mortgages, which are more commonly known as private mortgages, refer to loans that are made to residential property buyers. On the other hand, business owners are able to purchase or sell commercial property only by way of a commercial mortgage agreement.

Because business properties are usually valued much more highly than the average residential property, applicants are scrutinized much more heavily. This is in part because commercial mortgage backers have little recourse if the purchaser decides to file for bankruptcy. The commercial property in question may be foreclosed on or auctioned to offset the difference, but suing the responsible party is seldom an option.

In general, commercial mortgages are secured with some type of collateral. This collateral can come in the form of other properties, business equipment or even stocks. Comparatively, consumers looking to purchase residential property are almost always required to make a down payment. This cash payment is used to secure the property, and also to give the mortgage holder finance compensation in case the purchaser defaults.

Any person that wants to mortgage a piece of property in the US will need to demonstrate financial responsibility in the form of assets or a stable credit history. Business owners that want to buy commercial property will need to support the mortgage company with financial statements, usually including tax returns from the past few years. A completely financial breakdown detailing cash flow, debts and accounts receivable just also be supplied before the business property loan will be underwritten.

Just as different residential mortgage companies have varying qualification requirements, not all business financing work solely with businesses that are well established. A newly formed company may end up paying a higher interest rate than a more financially stable business entity, however, this is also true in the case of residential property buyers. Personal mortgages usually for 20 or more years, and interest rates do not change unless the buyer selected a variable rate. In the commercial mortgage industry, business owners are subject to balloon payments on a regular basis. Interest rates on commercial mortgages are also considerably higher than private mortgages because buyers are more likely to experience serious financial difficulties.

While just about anyone is capable of forming a legally structured business, not all business owners are qualified to get a commercial mortgage. Commercial lenders are most interested in the amount of growth that their customers have experienced than their total amount of debts. Consumers that have shopped for private residential mortgages understand the importance of maintaining a low debt to income ratio, but this is not the case in the commercial property market.

by: Timothy Capper

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