Before discussing the details of the 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 a home and, in this context, the home is a guarantee or insurance of the loan. This loan or debt must be paid according to the legal bond together with the interest, generally in a period of 10 to 30 years. The mortgage is not actually a debt, but acts as a guarantee for the debt contracted. There are different types of mortgages, some of which are, Basic Home Mortgage Loan, Commercial Mortgage Loan, Government Guaranteed Mortgage, Bi-Monthly Home Loan, Balloon Home Loan, Bi-Weekly Home Loan, Equity Mortgage, etc.
Commercial mortgage loans are those that are taken for business purposes and not for individual purposes and this loan uses real estate as collateral for payment. These mortgages must be paid in small monthly installments, days to a decade, and require a balloon payment. Therefore, the commercial mortgage makes use of lump sum or lump sum payment and amortization. The balloon payment is the lump sum amount that is paid after the years of monthly payment based on the contract. Amortization refers to the distribution of the total amount of the loan plus interest in smaller monthly payments as determined by the legal agreement. The interest on these loans generally remains the same throughout the term.
Commercial mortgages can be taken for many purposes, namely the purchase of buildings or land to start a new business or to expand the current business. Such loans can also be taken for investment purposes. Business loans are very useful for starting car wash businesses, shopping malls, resorts, hotels and restaurants, factories, warehouses, garages, schools, etc.
The granting of business loans depends on many factors. Mostly, commercial lenders take into account successful businesses. Normally, to live up to the lender’s expectations, the credit history of the business and the owner must be good and clear. For example, if any workplace has a good reputation, a good credit history, and decent occupants and workers, lenders will definitely be more inclined to lend to them than those with a negative history.
In addition, business lenders maintain a Debt Coverage Ratio (DCR) account that reports the business income required to cover the debt. In general, the DCR is expected to be between 1.1 and 1.4.
Some of the business loans are classified as NON-RECOURSE DEBTS. In this case, if the borrower defaults, the lender can only take the real estate or property, but cannot challenge the loss. It means that if the seized property is insufficient to cover the loan, the difference in the price of the property and the loan made is a loss for the lender.
Commercial mortgages are quite similar to residential ones, but commercial mortgages have real estate or commercial buildings as collateral, but have few noticeable differences. Commercial loans are slightly riskier than residential mortgages, so lenders will want a higher down payment. Residential loans have lower interest rates than commercial loans because they have a low secondary market. Commercial loans are short term, typically 10 years, while residential mortgages typically have terms of 20 to 30 years or even 40 years. Non-recourse debts make it difficult to recover loans.
Second-tier lenders play an important role in residential mortgages, as they buy and sell loans from major lenders and do not have any direct interaction with borrowers. Due to the non-issuance of direct loans, the investment of the second tier lenders is insured in the risks that the commercial mortgage faces.