Residential or Commercial Loan?

Question

When I spoke to a lender about purchasing a 4plex, they told me that was considered a residential loan, but any more units would make it a commercial loan.

We are looking at a 6-unit property. Would that be a commercial loan? If so, how would that differ from a residential loan as far as down payment, qualifiying, closing costs, etc?

Thanks!!

Nick Schoch · Answer

I am a loan officer at a large commercial bank. I'm saying that the appraiser takes 3 weeks minimum to provide a complete self-contained appraisal. Perhaps your appraisals are more simple? I.e. a summary appraisal report or limited appraisal report?

Michael Rossi · Answer

Then I would fire the appraiser and find one that wants to work!  Three weeks to do an appraisal - that's ridiculous and I absolutely wouldn't stand for it.

There are a couple of local appraisers that have screwed other members of our REIA (mainly due to incompetence).  When I get a loan from the bank, I tell them that I won't accept those appraisers (by name) to be used for my property.

Appraisers and banks are businesses.  We are their customers.  I expect (demand) good service.  If you get in your car and drive around town, you'll notice that there is a bank on just about every corner.  Find one that can get the job done and then develop a relationship with them.  Better yet, ask the SUCCESSFUL investors at your local REIA who they use and get an introduction to a key person at that bank.

Another key point is that you need to work directly with a decision make at the bank (President, Vice President, Chief loan officer, etc).  Every step you take away from that person increases the length of time it takes to get your loan done.  If you step away from the bank and use a mortgage broker, then you're not even near the starting line for a quick loan.

Finally, if you want to get your loan done quickly, you MUST take in a complete package on your first visit to the bank.  Don't make them play 20 questions over a period of weeks to get you to bring in all the required documents.

Mike

Michael Culler · Answer

Yeah MikeOH, how the heck do you get the appraisal back in days? 
            
            I had a multifamily (apartment building) appraisal take 6 weeks a few months back.

Of course the OP doesn't need a commercial loan anyway.  She just needs 2 residential loans.

Nick Schoch · Answer

2 weeks for a commercial loan?

That's impressive, MikeOH. It takes me a minimum of three weeks to get an appraisal done (and that's a quick one).

Michael Rossi · Answer

Kathy,

1 to 4 units can be either residential or commercial.  If you're in business and have an entity, like a LLC, that is buying the property, the bank will often consider that a commercial loan, which it is.  I have bought the majority of my houses and small multis, as well as my larger multis with commercial loans.

I completely disagree with the assertion that commercial loans are more difficult or time consuming.  I've had commercial loans that closed in two weeks and I don't find the application process to be any more difficult, complicated, or cumbersome.  You just need to learn what the bank expects for a commercial loan and give that to them.

Mike

Michael Culler · Answer

If it is two 3 unit buildings that are separate parcels then you need 2 residential loans.

K W · Answer

The properties are on two separate listings, so I imagine they are on two separate deeds.

Is it tough to qualify for two loans at once, or is that okay if the same lender handles it all and understands what you're doing? I was also worried about costs on two loans, but it sounds better than the terms of the commercial loans you are talking about.

Jon Holdman · Answer

Maybe a little tougher, but shouldn't make much difference.  You'll have to qualify for the full loan amount in any case, and the better rate on the residential loans should make that easier.  Hopefully, your income and DTI supports these loans.

Having two separate loans also makes it easier to sell them separately.  That improves your buyer pool when you go to sell.

Michael Culler · Answer

Commercial is a whole new ball game.  Appraisals cost more and take longer.  Rather than Debt to Income the look at a calculation called Debt Service Coverage.

Down payments and closing costs are more expensive.  Underwriting takes longer.

Lots more as well.  But if its a strong deal, it may be worth it!

Jon Holdman · Answer

In another post you say it is two triplexes.  Are they on separate deeds?  If so, use two separate residential loans.  You'll get better rates.  If they are on the same deed, then you're stuck with a commercial loan.  Every lender I've spoken with about commercial loans has been doing only a short, 3-5 years, fixed period.  Personally, I'd rather try to lock in a rate right now.