As when you buy a home and apply for a mortgage, you can also apply for a mortgage to purchase commercial or business property. Commercial real estate loans allow businesses to secure the funding they need for such a project.
Common Types of Commercial Real Estate Loans
Banks and other lenders grant commercial real estate loans for many different types of properties, such as industrial buildings, retail centers, multi-family units, etc. 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. 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
In an SBA 504 loan, which combines two different loans, a borrower can get 40% max of the loan amount from a Certified Development Company, and at least 50% from a bank. It is the borrower’s job to put no less than 10% as a down payment. 5 million, so the full project being financed can have a minimum value of $10 million.
Conduit loans are secured commercial mortgages collected together and sold to secondary market investors. 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.
Bridge loans literally “bridge the gap” up to the time when long-term financing for a commercial property is at hand. In certain cases, the long-term loan provider will supply the bridge loan as well. These loans are not amortized and have very limited terms – generally six months to two years.
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 unlike hard money lenders, soft money lenders are more concerned with the borrower’s creditworthiness and the quality of the application itself.