DID YOU KNOW? Commercial mortgage on a residential property!

Did you know that you can get a commercial mortgage on a residential property? Yes, it’s true.

In the world of financing, one of the differences between a residential loan and a commercial loan is who the loan is issued to. When a loan is issued to a person (or persons) the loan is considered a residential loan. However, when a loan is issued to an entity (LLC, trust, incorporation, etc.) the loan is considered a commercial loan, even if the collateral is a residentially zoned property.

When the loan is issued to a person, it will typically appear as a tradeline on that person’s credit report, as long as the creditor reports to the credit bureaus. When the loan is issued to an entity the loan is typically guaranteed by the entity and in some cases might have an additional guarantor in the form of the owner(s), members or shareholders of that entity. Often the loan does not appear on the additional guarantor(s) credit report, unless the loan were to go into default.

The real estate investor has the option of taking title on their investment properties in their own name (for 1 to 4 unit residentially zoned properties) or taking title in an entity. If taking title in their own name then the mortgage would be gained in their own name and would be originated by a residential lender and underwritten as a residential loan, and most likely appear on a credit report and the investor would most likely be capped at a certain number of open mortgages of this nature (sometimes that number is 10).

If the investor chooses to take title in an entity, the mortgage is originated in the name of that entity, often doesn’t appear on their credit report and typically there is no limit to the number of open mortgages of this type that an investor can have.

If choosing to purchase investment property in an entity and seeking financing on it (now or later), you should seek out a commercial lender (or commercial mortgage broker) and not a residential lender as they often are not familiar with commercial style lending. Residential lenders deal in debt-to-income (DTI) and consider personal incomes and debts in their underwriting, while commercial lenders deal with debt-service-coverage-ratios (DSCR) and expect the asset (the property) to pay its bills, not the investor.

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