A mortgage refers to a type of loan that uses real estate as the collateral in order to secure the payment of the loan in the future. A commercial mortgage will prove to similar to any other kind of mortgage loan, though the main difference will be that the real estate that is held as collateral will be in the form of a commercial or business building as opposed to residential property such as a home.
Commercial mortgages are usually loans that are requested by businesses or corporations as opposed to an individual person. Therefore, the most common entities involved in commercial mortgage loans are corporations, partnerships, and large companies.
In the United States, a commercial mortgage will simply require that the borrowing party make monthly payments over an extended period of time, usually 20 to 30 years. In other situations, companies will prefer to have a commercial mortgage that has a shorter life term, which would then usually consist of monthly payments with a balloon payment as the final payment to be rendered usually at the end of 10 years.
Business mortgage terms will then usually consist of two main factors: the amount of time until a balloon payment is to be made and the amortization. Often times, a commercial mortgage loan will take the form of what is referred to as a “10/30 loan,” which simply means that the loan has an amortization schedule of 30 years, but the actual repayment of the loan will be made within 10 years.
In other words, the monthly payments of the loan will be calculated using a 30 year amortization rate, but the end of the tenth year, the remaining balance of the loan must be paid in full.
Reasons for Mortgage Loans
Those seeking commercial mortgages will prove to have various reasons for securing this type of loan. Often times, companies will seek a commercial mortgage in order to purchase the land or actual building for the business. Another common application of commercial mortgages is to help finance an expanding business.
In many cases, if the business is profitable, it may require to expand its’ current facilities in order to accommodate the demand for its services. Many companies will often times seek commercial loans as a way to refinance a previous debt.
Criteria for Mortgage Loans
Most lending institutions will prove to have different sets of criteria imposed in order to be qualified for a mortgage. However, it can be generalized that the main factor for qualifying for a commercial mortgage loan is having the necessary financial backing in order to make the monthly payments in full and in a timely manner. This is usually referred to as debt service coverage ratio.
Another important aspect will be the borrower’s credit history. Though a pristine credit history many not be entirely necessary to secure a commercial mortgage loan, it will certainly help with obtaining favorable rates and terms of the loan itself.
However, it is usually assumed that there will be some sort of financial investment to be made when securing a commercial loan that comes out of pocket to appropriately secure the purchase of the commercial real estate or land.