Can You Buy A Commercial Property With A Residential Mortgage
If you are purchasing a commercial property, you can either use the existing commercial space or use your own house. You can secure a commercial property on your home for a lower interest rate, fewer fees, and the ability to borrow up to 100% of its value, all of which have significant cost advantages.
Different Terms For Commercial Loans And Residential Loans
Residential loans usually have repayment terms of 15 or 30 years with monthly payments based upon an amortization schedule. If the loan is a fixed rate loan, your interest rate will stay the same if the loan is a variable rate loan, your interest rate fluctuates, and your monthly payments may change, but the term remains the same.
Commercial loans vary wildly in their terms. Some are amortized others may require interest-only payments for a set number of years with a balloon payment due at the end . When such a loan matures, you may find that you still owe exactly what you borrowed, because your payments were only applied to interest.
Commercial Loans Lack Consumer Protections
Commercial loans are also not subject to certain consumer protections that are available for residential loans. For example, collections on a commercial loan likely do not fall under the Fair Debt Collection Practices Act .
Some states have special laws that protect homeowners facing foreclosure, such as New Jersey, which has the Fair Foreclosure Act. Among other things, the Fair Foreclosure Act requires mortgage lenders to give homeowners 30 days’ notice of intent to foreclose and provide a laundry list of information about their rights at the same time. Commercial mortgage lenders are not required to take any of these steps and can foreclose right away.
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So Where This Leads Us Is
To summarise, for the majority of investors who are thinking about using a limited company to invest through , the situation is:
- Your company doesn’t need to have been trading for any length of time: you can set up a company online now for £20, and use it to apply for a mortgage immediately.
- You, as director, are what matters. The lender will want to see that you can meet your obligations by looking at your job, income, credit history etc in exactly the same way as they would if you were taking out the mortgage in your own name.
- You will be asked to give a personal guarantee meaning that you’re personally on the hook for the company’s debt.
Effectively, the company is just a tax wrapper: the company takes out the mortgage to get more favourable tax treatment, but from the lender’s perspective it’s still all about you.
What Is A Commercial Mortgage
Commercial mortgages are for buying any land or property for business purposes. Similar to a traditional, residential mortgage, money is borrowed and secured against a property.They can also be used to expand an existing business and for residential or commercial property development. Through securing a business to a property they tend to be the principal resource for financing any business development plan.The commercial mortgage market represents a smaller market share than residential mortgages – although their overall value is disproportionately high. Unlike a residential mortgage, a commercial mortgage extends finance in four distinct ways:
- Buying business premises
- Developing an owner-occupied business
- Adding to a buy-to-let portfolio
Commercial mortgages are structured to suit both the lender and the borrower. The lender needs to see security on their loan and the borrower wants to benefit through reduced repayments .A commercial property mortgage is usually a long-term loan that provides the cash to purchase a business premises. The mortgage lender will typically lend up to 70% of the property’s value, leaving the business to pay its regular mortgage payments and utilising any working capital to fund the growth.Because most commercial mortgages only offer up to 70% of the total value of the property, the lender relies on the business to find the rest in order to complete the purchase. This is often a substantial amount of money to come up with.
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Buying Property Through A Company Name
Many investors decide to buy or refinance their property in the name of a Pty Ltd company for a variety of asset protection and taxation reasons.
Banks treat these loans differently than standard home loans so discover how to get approved.
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Can I Get A Commercial Loan On A Residential Property
- Austin, TX
I am trying to get around the 10 mortgage limitation that most banks have these days. My partner and I are buying distressed multifamily with hard money, rehabbing the properties, putting good tenants in place, and then refinancing . We are holding the properties.
So my questions are, is it possible to get a commercial loan, so that the note will be in the name of our LLC ? Additionally, does the note need to be non-recourse for the note to not show up on our individual credit reports?
We have reached out to several lenders and are having a hard time getting clarity on this.
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Where To Get A Commercial Real Estate Loan
If you’re wondering where to get a commercial building loan, there are multiple sources you can obtain one from. You’ll have to compare commercial loan rates from various lenders to find out which one works best for you.
The following is a summary of the pros and cons of working with certain types of lenders:
The Loan To Value Ratio
The LTV is how much you will be able to borrow against the value of the property you are purchasing. The lower the LTV, the lower the risk of the loan and the more likely it will be granted with favourable terms, while it can be more of a challenge to find high LTV loans. A low LTV is considered to be lower than 80% and a high LTV is around 85-90%.
For example, buying a £200,000 home with a £50,000 deposit and a £150,000 residential mortgage will give you a low LTV of 75%. Lenders will find this favourable because the high deposit value compared to the homes value means their investment is lower in risk. After all, you have already put in a fair amount of capital.
However, if you buy the same house with a £20,000 deposit and a £190,000 loan, youll have a high LTV of 90%. This will cause lenders to look for more security for their investment, either by denying the loan or charging higher interest rates to help regain their investment.
If you have a high LTV, you can help increase your chances of a favourable residential mortgage by increasing your deposit, having a financially secure partner co-sign the mortgage agreement, and working with a mortgage broker who can find the most competitive and affordable mortgage deals.
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Keep Business And Personal Lives Separate
Many LLC owners may like the idea that buying property with an LLC allows them to separate their property ownership from their personal lives. However, owners who use the LLC for personal expenses make it easier to pierce the corporate veil and disregard the corporation or LLC’s separate existence should the LLC face a lawsuit. Piercing the corporate veil can become an issue for LLCs of all sizes.
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Signing The Loan Documents In Your Own Name
Another way that you might potentially open yourself up to personal liability is by signing the mortgage documents, such as the promissory note, in your own name instead of the name of the LLC or corporation. By signing your own name, rather than on behalf of the LLC or corporation in your capacity as an owner or officer, you could be held personally liable for the debt.
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Can A Business Get A Residential Mortgage
The question of whether a business can get a residential mortgage is also frequently asked. Residential properties can be used for commercial purposes, as long as they are used for commercial purposes. In other words, if you are considering borrowing money to build an apartment complex with the intention of generating rental income, a commercial mortgage is a good option.
Commercial Real Estate Loans
If your property doesn’t qualify for a residential loan based upon the percentage of commercial space versus residential, you can use a commercial loan. Most banks offer commercial loan products including commercial mortgage loans to finance the purchase of real estate. Qualifying for a commercial loan takes a little more work, and it may also take more out of you than a residential loan.
Like a residential mortgage, commercial mortgage applications require you to provide your financial information, and commercial lenders will appraise the property. They may require further security, though, including personal guaranties and liens on other assets.
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Does Having A Mortgage Affect Getting A Business Loan
You might think your mortgage loan has no effect on your chances of qualifying for a business loan. After all, your business plan, past entrepreneurial successes and your company’s sales history are what really matter, right?
Not entirely. It’s true that lenders will look at your history of running businesses and your business plan when deciding whether you qualify for a business loan. But they will also look at your personal credit history and credit score.
This makes sense: Your credit score illustrates whether you’ve paid your past debts back on time and how well you’ve managed your credit. This gives business lenders information on how likely you are to pay back a business loan, too.
If you make your monthly mortgage payments on time, your personal credit score will improve. If you have a history of late payments, it will fall. Your mortgage loan, then, can play a significant role in determining whether you qualify for a business loan.
Advantages Of Having An Llc
Lets begin by reviewing the most important reasons for using an LLC in your real estate investing business:
Asset protection
The U.S. Small Business Administration notes that using a legal corporate structure like an LLC helps protect your personal assets from business-related debts or lawsuits.
If youre involved in a lawsuit, the other party can only attempt to hold your company liable instead of you personally. So, your personal belongings like a car, residence, and other assets arent at risk.
Easy to set up and register
Limited liability companies are relatively easy to form and register, with some states allowing the entire process to be done online.
While rules vary depending on the state the LLC is in, there are generally four steps to follow:
In order to apply for a mortgage under your LLC, the lender will also require copies of these documents.
Pass-through taxation
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You May Have To Pay Off The Mortgage Sooner
In some cases, the loan may have a shorter term than the typical 30-year term offered on the purchase of a primary home. But, just like with other types of mortgages, a rental property loan can either be fixed or variable, depending on the loan and the borrowers relationship with the lender, says Tom McCormick, regional officer of branch administration at Trustco Bank in Saratoga County, New York.
Types Of Commercial Real Estate Loans
Depending on the needs of your business and its qualifications, there are six primary types of commercial lending that you can use to achieve your goals:
You can find a variety of lenders for each type of loan, from commercial banks to credit unions to lenders specializing in commercial real estate loans.
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How Can I Get My Loan Approved
Our mortgage brokers are experts in getting mixed use property loans approved. We can assess your situation and determine the best way to represent it to the lenders.
We can assess each mixed property on its own merits. If the zoning isnt going to change, or the propertys purpose isnt going to change, then well have to match it up to the right lender.
As mortgage brokers, we can determine which lender will be best suited for your security property.
Call us today on 1300 889 743 or complete our free assessment form to find out how we can help you.
Purpose Of Business Loans
Commercial business loans are used as working capital, to buy real estate in connection with the business or to purchase inventory and equipment. Revolving lines of credit are often used to provide cash for the business over time, since the borrower can withdraw funds from the credit balance of the loan. Term loans are typically used to establish a business, purchase real estate and purchase inventory and equipment.
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How To Prepare For The Application Process
Applying for a commercial mortgage can be slow and often requires a lot of documentation. At the other extreme, you might be able to secure a hard-money loan in days without producing copious financial information.
In general, banks and lenders will require you to provide this common information:
- Business tax returns
- Your books, records and financial reports
- Last three months or more of bank statements
- Details regarding collateral
- Third-party appraisal of the property
- Business plan
On the other hand, a hard-money lender will concentrate on the current and projected value of the property, with fewer requirements for other financial disclosures.
Pros Of Commercial Real Estate Loans
Pros
- Tax breaks
- Equity
Commercial real estate loans offer more diversity and more options than a personal real estate loan or mortgage may afford. This includes repayment terms, interest rates, and payment schedules that can work with your business schedule and budget. Youll also enjoy the tax breaks that come with property ownership, and building equity can add value to your business as you continue making on-time payments.
There are also many property types you can purchase with a commercial real estate loan, including multi-family apartments, retail space, office space, and single-family homes.
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Are Shareholders Responsible For The Loan
Generally speaking, shareholders arent required to guarantee standard residential investment loans.
Although, in many Pty Ltd companies, the directors and shareholders are one in the same.
However, there are major shareholders who are not directors of the company applying for the mortgage.
In these cases, the bank will assess the loan on its merits and may require a guarantee from the shareholder as well.
Transferring Mortgages To Llcs
Once your LLC has been formally organized and registered within your state, the company can enter into its own contracts and take on funding. This also means that the LLC can hold and transfer real estate titles. If you have owned property as an individual that you now want to put under the protection of the LLC youve created, you can not only transfer the title but also the mortgage.
Transferring a property with a mortgage to the ownership of an LLC will require the investor to take several steps. First, they need to complete what is known as a quitclaim deed. When these deeds are executed, they transfer any interest the grantor had in the property to a grantee, in this case, the LLC. Some states have specific laws around transferring ownership, so it may be worthwhile to follow up with an attorney. Transfer taxes could also apply.
The second step is to have the quitclaim deed recorded. The deed needs to be taken to a county clerks office, creating a public record of the transfer and ensuring that you are no longer associated with the deed personally. A nominal fee may apply, but this step is a legal requirement and cannot be skipped.
Be aware that this ownership change could lead to an increase in rates. Its important to look at the terms offered by the mortgage lender you are working with before you officially enact the transfer.
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Securing A Commercial Mortgage Loan
Lenders are more aggressive in securing their interests when making commercial loans. If the borrower is a business entity, the lender will likely require one or more of the business owners to personally guarantee the loan â that is, sign a document saying that if the business doesn’t pay, the owner will be personally liable.
The lender may also require additional security if the corporation’s finances aren’t strong enough such as an additional residential mortgage on the owner’s personal residence or a lien on personal property like equipment and inventory.
What Do The Banks Assess
There are a number of factors that banks and lenders look at to determine your eligibility for a commercial loan:
- The yield and cap rate.
- The bank valuers recommendations.
Do you qualify for a mortgage to buy a mixed use property?
Please call us on 1300 889 743 or complete our free assessment form to find out how we can help you.
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