Many young and eager business owners apply for a commercial real estate loan with a misconception that the process is similar to a consumer mortgage loan. But there are notable differences between the mortgage real estate loan process and the consumer commercial loan process you should be aware of before you apply for a loan to support your growing business.
Let's first clear up the biggest difference between consumer mortgages and commercial real estate loans (business): the uses. Consumer mortgages are a type of loan from a bank or lender to help you finance the purchase of a home. Commercial real estate loans, on the other hand, lend business owners a sum of money to invest in their business. Business loans can be used for a wide variety of business-related expenses, from new equipment to hiring and beyond. Let's talk about a few of the other differences between mortgage and commercial loans:
Rates:
Interest rates for consumer mortgages are typically lower than commercial real estate loans. A business loan will likely carry a higher interest rate, depending on the amount borrowed and term, among other factors.
Term:
Consumer mortgages are typically longer term, but business loans are generally much shorter. Business loans often range from 3 to 10 years, with 10 year loans being on the rare side.
Collateral:
The collateral is basically "insurance" for the lender that you will pay back your loan. For a consumer mortgage, your collateral is simply your home, meaning you will lose your home if you aren't able to pay back your loan. For a business loan, the collateral will depend on your lender and your qualifications but can be defined as "anything of value."
Finally, the Process:
In going through the consumer mortgage process, you may generally:
- Get prequalified for a mortgage*
- Apply for a mortgage
- Order a home inspection
- Purchase homeowner's insurance
- Lock in your rate no later than 10 days prior to your closing date*
- Review your documents
- Arrange for down payment/ closing costs*
- Unlock your new home
The commercial real estate loan process is a bit more involved and requires extra documentation, you may:
- Get prequalified for a loan*
- Apply for a loan along with providing collateral which could include stocks, bonds, and real estate*
- Receive letter of intent of term sheet with all pertinent loan information to sign*
- Wait for the loan to be approved during which additional documentation may be required
- The loan application package may be resubmitted to the loan committee for final approval
- Sign the finalized loan documents if and when the loan is approved.
While these are the overarching differences between the consumer mortgage and commercial real estate loan processes, it is not an exhaustive list. Our commercial lenders have over 100 years of collective experience and leverage their know-how to make sure their customers get the right loan for their needs. Citizens Bank Commercial Lenders are happy to educate you on the ways in which personal and commercial loans operate. Stop by and see us today!
*Check with your lender to see if this is offered or is an option and what the requirements are.
FAQs
The stark difference between these mortgages lies in their intended purposes. Residential mortgages cater to individuals or families looking to finance personal residences. Commercial mortgages, however, are designed for businesses or investors aiming to secure properties intended for revenue generation.
What is the difference between a consumer loan and a commercial loan? ›
A commercial loan is used by companies to buy equipment or grow a business. A consumer loan is used to finance automobiles, home remodels, and other items for personal use.
What is the difference between a mortgage loan and a commercial real estate loan? ›
Unlike buying a home with a residential mortgage, the underlying asset for a commercial loan is not a primary residence. Instead, the commercial lender underwrites based on the income — such as rent from tenants — and expenses that the property will generate.
How are consumer residential mortgage loans different than commercial mortgage loans? ›
Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years.
What is the difference between a consumer loan and a real estate loan? ›
To get a mortgage, a down payment is required. The minimum standard down payment is 3% of the property value. To get a consumer loan, you do not need a down payment. Typically, mortgage interest rates are much lower than consumer loans.
How to differentiate between business loan and consumer loan? ›
Understanding the differences between business and consumer loans is crucial for individuals and entrepreneurs seeking financial support. While business loans aid business-related expenses with larger amounts and longer tenures, consumer loans cater to personal needs with smaller amounts and shorter repayment periods.
What is a consumer mortgage loan? ›
Consumer mortgages are a type of loan from a bank or lender to help you finance the purchase of a home. Commercial real estate loans, on the other hand, lend business owners a sum of money to invest in their business.
What is the difference between a mortgage and a commercial mortgage? ›
It can often be the right course of action for business owners who are looking to avoid increasing rents, or maintenance and management fees. The main difference between a commercial mortgage and a residential mortgage is that the value of the land or property is usually much larger.
Which is the greatest difference between commercial mortgages and residential mortgages in the underwriting process? ›
Multiple Choice Residential underwriting focuses on the borrower. while commercial underwriting focuses on the property Residential underwriting focuses on property Income, while commercial underwriting focuses on property cash flow Borrower. There are 3 steps to solve this one.
Can you do 30 years on a commercial loan? ›
Commercial property mortgage loans are typically long-term loans that can last up to 30 years. However, there are other types of commercial property loans that beyond the conventional commercial mortgage loan that offers shorter terms and will depend on your unique business needs.
Key Takeaways. Business credit reports contain information on a company's ownership, finances, and use of credit. Consumer credit reports focus on how individuals have used credit in the past.
What is the difference between a conventional loan and a commercial loan? ›
Most residential loans are for 30 years. In contrast, commercial loans are often amortized over shorter periods. With a shorter term loan, it's less risk for the lender and they get higher payments every month. For you, this means your costs go up.
How do commercial real estate requirements differ from private residential mortgages? ›
With a traditional mortgage, it's possible to borrow up to the full value of your home (depending on the specific loan program), for an LTV of 100%. With commercial real estate loans, however, lenders prefer a maximum LTV of 75% to 80%. This means you may need to put at least 20% to 25% (or more) down to be approved.
What is the difference between a consumer loan and a mortgage loan? ›
Key Takeaways. A personal loan is usually unsecured (i.e., without the need to provide collateral). Mortgages are usually used to purchase real estate and are secured by the property bought with the loan. Personal loans can usually be funded faster than mortgages, but they might have higher interest rates.
What are the two most common types of consumer loans? ›
The Basics of Consumer Loans. There are two primary types of debt: secured and unsecured. Your loan is secured when you put up security or collateral to guarantee it. The lender can sell the collateral if you fail to repay.
What is the difference between consumer loan and non consumer loan? ›
Consumer debt is a debt incurred by an individual for primarily personal, family, or household purposes. Anything else is non-consumer debt.
What is consumer vs commercial? ›
1 - A consumer is any natural person who is acting for purposes which are outside his trade or profession. A commercial customer is a customer who is not a consumer.
What makes a loan a commercial loan? ›
What Is a Commercial Loan? A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford.
Is a business purpose loan the same as a consumer loan? ›
Key Takeaways. Business loans are a source of funding that's used exclusively for business-related expenses. Personal loans are made out to the borrower directly and can be used for personal and/or business purposes.
