Just like buying a home through a mortgage, you can also purchase commercial property through one. Commercial real estate loans allow businesses to secure the funding they need for such a project.
Popular Types of Commercial Real Estate Loans
Most banks and lenders offer commercial real estate loans for a range of properties, from retail stores to office buildings to multi-family units and so on. Similar to a home mortgage, the commercial loan will be secured against the property for whose purchase it was intended. Note that traditional mortgages are generally harder to secure than any other type of commercial mortgage.
SBA 7(a) Loan
The 7(a) loan is the flagship loan of the Small Business Administration, and it meant for loans to be used in buying land or buildings, renovating currently existing property or building a new property, all with the condition that the owner will occupy the real estate. The maximum amount that may be borrowed under this program is $5 million, and the loan will be coursed through an SBA affiliate lender. Such loans are fully amortized, which means monthly payments will be at fixed amounts until the balance is paid off.
SBA 504 Loan
An SBA 504 loan is a fusion of two unique loans: a maximum of 40% of the loan amount will be provided by a Certified Development Company, and up to 50% and above by a bank. A minimum down payment of 10% is expected from the borrower. 5 million, indicating that the financed project can have a value of at least $10 million.
When securitized commercial mortgages are fused together and sold to investors on a secondary market, that is called a conduit loan. The most important differences between conduit and traditional loans are related to prepayment and loan administration issues, as well as to how flexible the borrower is when it comes to loan terms. The least possible amount that conduit lenders usually finance is within the range of $1 million to $3 million, with terms of 5 to 10 years and an authorization period of 20 to 30 years.
As their name suggests, bridge loans “bridge the gap” until long-term financing for the commercial property is obtained. Sometimes, the lender that provides the long-term loan will provide the bridge loan too. These loans come with very short terms – anywhere from six months to two years, and a lot of them are not amortized.
Soft Money vs. Hard Money Loans
Hard money loans resemble bridge loans in many ways, their main difference being that hard money loans are typically sourced from private companies and have greater down payment requirements. On the other hand, soft money loans are half hard money loan and half traditional mortgages. But in contrast to hard money lenders, soft money lenders place more emphasis on the loan applicant’s creditworthiness and how the application’s convincing power.