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What is the difference between a housing loan and a commercial property loan?

Couple staring in front of their newly bought house

If you’re planning to buy a new house, you want all the best home-buying tips you can get from the right sources. With so many things that come with the home-buying process, it is easy to lose track of what’s essential. Add to that the areas that you have little to no knowledge of.

When it comes to securing a house, one of the most common concerns of buyers is funding. Thankfully, you don’t have to pay in cash especially when you’re on a budget. Instead, you can apply for a loan to help make your payments more manageable. Where loans are concerned, there are two types that tend to confuse a lot of people: the housing loan and the commercial property loan.

What is the difference between the two? Let us break down each type and see how they differ.

What is a housing loan?

Getting a working knowledge of loans is among the most important real estate tips for buyers. A loan is one of the keys that will help you secure the property you want. Thus, you need to learn its key elements and the dynamics surrounding it. Let us begin by defining what a housing loan is.

A housing loan is what others often call a mortgage. It is a certain amount of money that you borrow either from a lending company or a bank. When the bank or lender agrees to loan the money you need to fund your home purchase, they will assign a certain period wherein you will pay the amount in monthly installments with interest on top.

There are different types of housing loans you can apply for. If you want to take out a loan to buy a house, a home purchase loan is what you will apply for. If you want to buy a piece of land, a land purchase loan is what you need. If you want to cover the cost of building a house, a construction home loan is your default option.

One of the key elements of a housing loan is the borrower. In this case, it is an individual who borrows the money. Also, the lender will look into the borrower’s credit scores to see if they qualify for a loan or if they are a financial risk.

What is a commercial property loan?

A commercial property loan is also a mortgage. However, the key player is not an individual. Instead, a business entity is the one that borrows the money. It can be a developer, a corporation, a trust, or a fund.

In this case, the business entity may or may not have any credit rating. If the latter is the case, the bank or lending company may require the owners of the entity to guarantee the loan on behalf of their company.

Aside from the purpose of acquiring a property, the entity can use the money to build and develop it.

The key differences: The type of property

Let’s try to break down the major differences between a housing loan and a commercial property loan. One of the key differences worth noting is the type of property involved. With a housing loan, the mortgage is secured on a residential property.

On the other hand, a commercial property loan involves an income-producing property that will be used exclusively for business purposes. Examples of such commercial properties are office buildings, shopping malls, hotels, and complexes.

The down payment

The amount of down payment lenders require from borrowers is another big difference between the two. With a housing loan, you can generally negotiate the amount with your lender. The lending company may find ways to adjust the down payment to accommodate your financial capabilities.

Meanwhile, lenders will be stricter in commercial mortgages. They will likely require a 25% to 35% down payment from their borrowers. This is because the risks involved in commercial mortgages are bigger compared to residential loans.

The risk involved

As mentioned above, the risks play a big part in the amount of down payment. The risks in commercial loans far outweigh the ones that come with home mortgages because the payments in a housing loan generally depend on a single person. Hence, banks and lenders can conduct background checks and review your credit score before approving your application.

If they see that your credit score is sub-par, they can reject your application outright. On the other hand, banks and lenders will have to predict if the business entity will succeed and make enough money to cover the payments.

The interest rates

When it comes to interest rates, home loans tend to have lower rates compared to commercial mortgages. However, this is not always the case if the loan’s amortization is only for the short term.

Meanwhile, commercial property loans also come with additional fees. These include legal, survey, appraisal, and loan origination fees.

The repayment window

Lastly, they also differ in the repayment window. Housing loans have more flexible repayment periods because they are less risky. You can negotiate for as short as 10 years or as long as 50 years.

As for commercial property loans, business entities may even face penalties if they pay their mortgage too soon.

If you’re looking for the best advice for buying a home, RE/MAX can guide you every step of the way. Connect with one of our agents who are knowledgeable in the local real estate scene.

They will also be more than happy to give real estate advice for buyers. Call us up at 484.467.8480 or send us an email at remaxdirectwc(at)gmail(dotted)com today.