Differences between residential and commercial loan origination

September 19th, 2018

1. Location: unlike residential loans where the loan in Newport Beach and the loan in the middle of nowhere are treated the same , lenders for commercial loan have different appetite for different locations and they price the loan accordingly. The majority of them will not lend in cities that have less than 20,000 in population. Some of them will not go into 3rd tier or even 2nd tier cities. So, make sure you check with the lenders on their lending areas before going further.

2. Property type: with residential loan, there is only one kind, 1-4 units. With commercial loans, you will run into a variety of what we call “property classes” such as apartment complex, office building, retail center and the list can go on and on. No commercial lender will do each and every property class so make sure you check with them the type of property that they will lend on.

3. Income requirement: for residential loan, the stated income loan became extinct after the crisis with all the new rules and regulation. There are some changes on the commercial loan side too. Some bank will require personal income tax now to do what they call “ global underwriting”. What it means is besides the income generated from the property itself, the borrower(s) personal income has to be able to support all his/her personal liabilities. Unlike residential loan, more than a few commercial lenders still offer the stated income program for a higher rate. So , whenever you see such an attractive rate advertised, make sure you check with the lender(s) on the personal income requirement.

4. Interest rate & fees: for residential loan, it’s rate sensitive environment. Lenders compete for business with a .25 or even .125 difference in rate. However, for commercial loan, the loan amount the borrower(s) ask for is the decisive factor because commercial means investment and people try to leverage as much as possible. Lots of time, people are willing to accept the higher rate and fees for a higher loan amount. Therefore , make sure you can get the loan amount the borrower(s) want before discussing about the rate and fees.

If you have any other questions, please call Eric Tran at 714-300-8223