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Commercial Real Estate Loans 101: Understanding the Different Types

Businesses can start in just about any location. You are probably familiar with Steve Jobs starting Apple in his garage years ago before expanding to a worldwide phenomenon.

Right now, you might be working out of your home office and while that’s good for now, you’re eventually looking to expand. Not by taking over more rooms in your home, but moving to a commercial building.

Just like any other kind of real estate, you’re more than likely going to have to acquire a loan before doing so. There are plenty of commercial real estate lenders to check out before you can find one that works for you.

There are a few different types of commercial real estate loan and we’re going to run through the basic kinds to help you understand them.

Commercial Real Estate Loan Basics

Before we discuss the different types, we need to discuss how these are different from your regular home mortgage.

First off, many lenders require the owner to be physically at the business for 51% of the time. You can acquire a loan for a variety of commercial real estate, with anything from restaurants to hotels.

The terms are also a bit different as well. Down payments tend to be anywhere between 10-50% and repayment years are also different, anywhere from 5-25 years. 

Many loans have interest-only payments through the first few years and then a giant balloon payment at the end to pay off the loan in full. They can also be fixed or variable loans.

SBA 7(a) Loan

Get ready to hear a lot about the SBA, Small Business Administration, when you’re setting up your business.

They also offer loan and the 7(a) loan is by far their most popular and widely used. It can be used for many different ventures, such as purchasing land, renovating property, or buying new property.

You can borrow up to $5 million and these loans tend to have a repayment period of 25 years. They are fully amortized so each monthly payment will be the same until the end of the repayment period.

Traditional Commercial Mortgage

Perhaps the most popular commercial mortgage out there, these are supplied by lenders, online institutions, and more commonly, banks. They can also be used for a wide variety of properties and do require them to be owner-occupied.

Terms can vary greatly depending on the lender and what terms they want to set. Some are 25 years while others are 10 years. There is often a laundry list of requirements that mush be checked before a loan is handed out.

Typically, banks are the stingiest of all institutions and will ask for more supporting documents and evidence while also taking longer to approve the loan.

Commercial Bridge Loan

Bridge loans are intended to hold steady or bridge the gap until long-term financing is secured. Since these types of loans are for very specific situations, their terms are often much shorter, being as little as six months in some cases.

The majority require balloon payments at the end of the repayment term with the borrower paying off interest for the first few terms of the loan.

Down payments are quite small, as little as 10%. Traditional commercial mortgages usually ask for about 25%.

Soft or Hard Money Loan

Hard money loans are pretty similar to bridge loans but are made by private companies. They require much more than the 10% down payment. They also have short loan terms and high-interest rates. They’re easy to qualify for and take less time to be approved.

Soft money loans, on the other hand, are a bit of a love child between your traditional mortgage and a hard money loan. Soft money lenders offer a lower interest rate, small down payment, and have longer terms. 

They are also easy to obtain and are ideal for business owners who are trying to make a fast play on a property but are scared off by the high-interest rates you may be getting with hard money or bridge loans. 

Conduit Loans

These loans are a bit complicated, as they are various mortgages grouped together and sold to investors via a secondary market. They function quite similarly to a traditional loan but vary in their terms.

They require balloon payments at the end and usually have a minimum loan amount of somewhere in the neighborhood of $1 million. 

Kevin Darabont

I am a freelance writer who loves to craft, home decor improvement, and active DIYers. I am happy to share my knowledge and experience to the world and learn new things everyday.

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Kevin Darabont

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