Before discussing the details of commercial mortgage, a few words would explain what the mortgage is for. A mortgage is a loan that is basically taken for the purchase of home and in this context, home is a collateral or insurance for the loan. This loan or debt has to be paid in accordance with the legal bond along with interest, usually over a period of 10 to 30 years. Mortgage is not actually a debt but it acts as a security for the debt taken. There are different types of mortgages, some of which are, basic home mortgage loans, commercial mortgage loans, Government guaranteed mortgages, bimonthly mortgage loans, balloon mortgage loans, biweekly mortgage loans, equity mortgages, etc.
Commercial mortgage loans are the ones that are taken for business purposes rather than for individual resolves and this loan makes use of real estate for payment security. These mortgages are needed to be paid off in small installments on monthly basis, days to a decade and require a balloon payment. Thus, commercial mortgage makes use of balloon or bullet payment and amortization. Balloon Payment is the lump sum amount that is payable after the contract-based years of monthly payment. Amortization refers to distribution of the total loan amount plus the interest into smaller monthly payment as determined by legal pact. The interest for these loans typically remains same for the entire term.
Commercial mortgages can be taken for many purposes, namely, purchase of buildings or sites for starting a new business or for extension of the current business. Such loans can also be taken for investment purposes. Commercial loans are very helpful for starting business of carwash, shopping centers, resorts, hotels and restaurants, factories, warehouses, garages, schools, etc.
The grant of commercial loans is dependent on many factors. Primarily, commercial lenders take successful businesses into consideration. Normally to measure up to the lender’s expectations, the credit history of the business as well of the owner has to be good and clear. For example, if any workplace has good reputation, a positive credit record and worthy occupants and workers, lenders will definitely be more inclined to grant them the loan rather than to those who have negative track history.
Also, commercial lenders keep an account of debt coverage ratio (DCR) which tells about the business income that is required for debt-coverage. Generally, DCR is expected to be between 1.1 to 1.4.For instance, if DCR is 1:1.3, it shows that company will have 1.3 percent income greater than due amount.
Some of the commercial loans are graded as NONRECOURSE DEBTS. In this case if the borrower defaults then the lender can only snatch the real estate or property but cannot question for the loss. It means that if the seized property is insufficient for covering up the loan, the difference in the property price and granted loan is a loss for lender.
Commercial mortgages are quite similar to the residential ones but commercial mortgages have real estate or commercial buildings as security but they do have few striking differences. Commercial loans are a bit riskier than the residential mortgages so lenders would want more down-payment. Residential loans have lower interest rates than commercial ones because they have low secondary market. Commercial loans are of short duration, typically 10 years whereas the residential mortgages usually go up to 20 to 30 years or even 40 years term. Nonrecourse debts make loan recovery difficult.
Second layer lenders play importance in residential mortgage as they buy and sell loans to the chief lenders and do not have any direct interaction with the borrowers. Due to non-issue of direct loans the invest of second layer lenders is secured in risks faced by the commercial mortgage.
By: Tania Avais
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