From the point of view of a borrower there should be no differences between a residential and commercial mortgage. A mortgage broker looks at those two from a completely different angle. They are two totally different deals altogether. In this article I have tried to write briefly about the main differences between them. Please remember that the backdrop of this writeup is Canadian mortgage industry.
- A commercial deal is based upon much more numbers of parameters than a residential deal. Say for example – the running cost of the business, assets, history of that business, business plan, financing plan, credit worthiness of the owners, personal incomes of the owners, potential income, location, feasibility, environmental impacts, financial impacts are to name a few.
- A business mortgage may require some other types of loan other than a mortgage, like bridge financing etc.
- Usually in a commercial loan the goodwill part is not mortgageable. There are some exemptions to this. In a residential mortgage there are no such factors.
- A residential mortgage amortization period goes up-to 35 years. Commercial lenders are not ready to wait for so long. The reason is – longer the mortgage amortization period, higher is the risk in commercial businesses.
- Is it almost certain that a commercial loan needs an appraisal report and or an environmental assessment report. Whereas a residential loan usually receives funding without such assessments – if it is not a refinance or some kind of Home Equity loan.
- Commission to the broker in a normal residential deal is paid by the lender. In a commercial deal the borrower pays the broker a fee (generally speaking). This is the most tricky part of this industry. There are many instances where the borrower gets in direct contact with the lender after the broker arranges everything for them. In this process the broker looses his legitimate due towards his efforts.
- Chances are that a residential deal may be closed and funded – many times higher than that of a commercial deal.
- A residential deal process is simpler than a commercial deal. All a person has to do in the former case – is to get the application and consent form signed and run a credit check. After the credit check, it has to be determined based upon the lenders underwriters guidelines and client needs – which product or products to be offered. In a commercial deal there are no clear guidelines. Every lender has their own set criteria. The preconditions are based upon multiple factors. It takes a lot of pencil sharpening to get one lender to agree to lend.