Commercial Loan vs Conventional Loan

If you find yourself asking what’s the difference between a Conventional loan vs a Commercial Loans then it is possible that you are also considering a Real Estate Loan (CRE). If that is the case then here are some key differences between the two that ought to help you in making that decision easier. What follows is some information that ought to help  you in deciding when to choose between these two main types of loans.

Let us take a look at some of their key differences, their pros and cons, and when to choose one over the other: 

Differences Between Commercial and Conventional LoansCommercial Loans are used to purchase Business related properties such as:

Commercial Loans are used to purchase Business related properties such as:     

• Warehouses               
• Retail Spaces         
• Office  Buildings         
• Apartment Complexes (5+ Units)         
• Other Income Generating Properties     

Conventional Loans on the other hand are used for Residential Mortgages. These consists of Residential buildings of 1 - 4 units such as:            

• Condos               
• Townhouses               
• Single Family Homes    

Features

 Purpose 

Down-Payment

Interest Rates 

Loan Terms 

Qualification 

Underwriting 

Commercial Loan 

Income Generating Properties Typically higher (20% - 35%) 

Usually Higher than conventional loans 

Shorter (5-20) years sometimes with a balloon 

Focus on property income potential, business health. 

More complex, in-depth analysis.

Conventional Loan 

Owner-Occupied Residential Properties 

Can be as Low as as 3% with good credit 

Generally lower than commercial loans 

Longer (typically 15-30 years) 

Focus on Borrower’s credit, income, debt-to-income. 

Less complex, mostly standardized. 

More Pros and Cons 

Pros:  Commercial Loans  

• Access to funding for larger more expensive properties.         
• Potential for higher returns on investments (as property generates income)   
•  Can offer some flexibility in terms and structure.    

Cons:

• Stricter qualification requirement.         
• Higher interest rates and larger down payments.         
• Shorter repayment terms. increasing monthly payments    

Pros: Conventional Loans  

• Lower interest rates and down payment options.         
• Longer repayment periods         
• Easier qualification process    

Cons:     

• Not suitable for income generating properties         
• Sometimes has limits on the maximum loan size  

Which Should You Choose? 

For most individuals entering into the world of rental income properties, it is usually by way of buying a single family home and renting it out. Most Fix and Flippers usually enter income producing properties this way. The advice they receive is that you should aim to hold-on to one in five properties that you repair and keep it for income. 

As an entity, usually a husband and wife can purchase up to 20 single units and keep for income. This is usually divided into two sets of 10 each. Those who do it this way usually complain that they find it as being stressful, and this is without even considering working with the banks or Credit Union on each loan.Another drawback is that banks will not allow you to take out a conventional mortgage in a LLC (Limited Liability Company). 

There are various subsets to both kinds of loans Conventional and Commercial. Which should you choose would depend on what you wish to do with the property, your financial state, your property management choice and other individual preferences that you hold.

 A Commercial Loan is best if:     

• You are purposefully purchasing the property solely for business.         
• The property is expected to generate income that is intended to offset the loan cost and provide you with some cash flow..            You have prepared a sound business plan, and have the financials to support it.   
• You have drawn up a team of professionals to work with you for the success of the project.    
• If the property is a solid cashflowing entity the bank might not even be concerned about your personal credit. Simply put the more income the property generates the less important is your income and credit to the bank.   

A Conventional Loan is best if:     

• You are seeking a property to live in: Think Residential.         
• You are seeking the most affordable interest rates and the lowest down payment options. 

Now just as there are a multiplicity of lenders doing loans out there; so are there probable as many different variations on the available loans out there. It all comes down to the individual seeking the loan. Do you have the required down-payment? Is your credit up to the required level that the bank needs to qualify you for the loan? Yes and you qualify. No and your loan gets rejected. However, that “no” is not a final answer either. As stated earlier there are several different ways to get approved for a loan . 

Many banks have built their entire banking business on Commercial Loans. They go by different names such as Commercial Banks, Merchant Banks and other cooperatives and associations. Added to this list are several funds that are setup to facilitate business loans and they are most aggressive at that. If this still cannot suffice you then there are Hard Money Lenders that will be glad to be of service to you.There are some slight differences between Commercial Banks, Fund Managers and Hard Money lenders. The latter does not usually lend beyond 3 years, they mostly only lend no more than 70 % of the value of the property under consideration. And their rates are the highest of all considered here. Also they will hardly ever lend to residential properties. 

SBA Loans 

One lender that stands out from all the rest is the SBA. Now in actuality the SBA does not make any loans at all. What it does is provide guarantees to lenders that if there is a default they are guaranteed that their funds will not be lost. The SBA provides over 10 different types of loans. The main thing that is of interest here is that they lend from about $500.00 up to $5.5M. Finding a bank who offers loans such as those mentioned might be hard to come by. However with the backing of the SBA any small business startup would be given a chance. 

In rounding up conventional loans can provide you with flexibility and higher loan amounts, but that comes at a price of stronger credit worthiness, stronger collateral and larger down payments. While SBA loans allow lower down payments, better interest rates and offer guarantees to the lenders via government programs but then that comes with longer waiting times, stricter eligibility and a whole lot more paperwork. 

Added to all this is the fact that SBA have strict guidelines about the use of their funds. Since this a Government program  focused on promoting job creation and economic growth while supporting small business. The guidelines are strict; the funds are generally utilized for activities such as real estate acquisition, equipment purchase,working capital and all things related to the health of the business. 

While all lenders have closing costs these costs can vary wildly and they certainly add up. Fees such as appraisal fees, origination fees, title insurance, legal costs and other fees, can come to quite an impressive amount. The SBA limits the fees that lenders can charge, thereby reducing the financial loan on borrowers. Also more good news to borrowers as the SBA offers fee waivers for specific loan programs such as the SBA 7(a) loan program for certain eligible borrowers. 

It will be difficult to list all that exists in the world of Commercial Lending and Conventional loans via the SBA in such an article as this. Therefore when you begin considering applying for your loan it would be a good time to contact a Broker for an open discussion on what it is you are seeking to accomplish and learn a bit from them which ought to assist in guiding you in the right direction. 

That is where you might want to give me a call.