Just like buying a home through a mortgage, you can also purchase commercial property through one. Commercial real estate loans enable businesses to have the funding required for such a project to roll.
Common Types of Commercial Real Estate Loans
Banks and lenders approve commercial real estate loans for a whole array of property types, including storefronts, industrial facilities, multi-family units and more. Just like a residential mortgage, the commercial loan will be secured by the property to be acquired. Note that traditional mortgages are generally harder to secure than any other type of commercial mortgage.
SBA 7(a) Loan
The Small Business Administration’s flagship loan is the 7(a) loan, which is intended for the purchase of land or buildings, the construction of new property, or the renovation of existing property, as long as the real estate will be occupied by the owner. This program allows loans of up to $5 million through a lender who is recognized by the SBA. Payments will be made at a fixed amount monthly since these loans are fully amortized.
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 borrower will have to pay at least 10% down. 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 major differences between conduit and traditional loans are a matter of prepayment and loan administration, and of the flexibility of the borrower when it comes to loan terms. Conduit lenders will finance a minimum amount $1 million to $3 million; terms are usually 5 to 10 years; and the authorization period is between 20 and 30 years.
Bridge loans are meant to “bridge the gap” until long-term funding is available for the commercial property. Occasionally, the lender that grants the long-term loan is also going to provide the bridge loan. Such loans are very short-term – around six months to two years – and are often 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 as opposed to hard money lenders, soft money lenders put more weight on the the borrower’s credit background and the application itself.