Generally, it is not possible to purchase a commercial property with a residential mortgage. Commercial properties require commercial property loans, which have different rules and terms compared to residential mortgages.
Key Facts
- Fannie Mae offers residential mortgage financing for properties being used for both residential and commercial business purposes simultaneously. However, the property must be a one-unit building that is primarily residential and cannot be modified in a way that would hinder its marketability as a residential property.
- Generally, commercial properties require commercial property loans, which have different rules and terms compared to residential mortgages.
- Commercial property loans are specifically designed for purchasing property intended for commercial use, such as retail locations, office buildings, warehouses, restaurants, medical facilities, and housing developments.
- Commercial property loans come with certain requirements, including the need for the property to be used for commercial purposes by the business obtaining the loan. Additionally, there are requirements related to the business entity, credit scores, down payment, debt-service coverage ratio, and use of the property.
- Commercial property loans have different terms and amortization compared to residential mortgages. While residential mortgages typically have a 30-year term and amortization period, commercial loans often have shorter terms (15 or 20 years) and require a balloon payment at the end of the loan term.
Commercial Property Loans
Commercial property loans are specifically designed for purchasing property intended for commercial use, such as retail locations, office buildings, warehouses, restaurants, medical facilities, and housing developments. These loans come with certain requirements, including:
- Business EntityThe business must be structured as a business entity, such as an LLC or S corporation.
- Credit ScoresCommercial lenders use the FICO Small Business Scoring Service (SBSS) to evaluate a company’s ability to repay a loan. A minimum SBSS score of 155 is typically required.
- Down PaymentCommercial property loans typically require a minimum down payment of 20%.
- Debt-Service Coverage Ratio (DSCR)The DSCR compares the property’s net operating income to its annual mortgage debt service. A DSCR of 1.25 or higher is often preferred by lenders.
- Use of PropertyAt least 51% of the property must be used for commercial purposes by the business obtaining the loan.
Terms and Amortization
Commercial property loans have different terms and amortization compared to residential mortgages. While residential mortgages typically have a 30-year term and amortization period, commercial loans often have shorter terms (15 or 20 years) and require a balloon payment at the end of the loan term.
Fannie Mae Mixed-Use Mortgage
Fannie Mae offers a Mixed-Use Mortgage program that allows for residential mortgage financing for properties used for both residential and commercial purposes simultaneously. However, these properties must meet specific criteria:
- One-Unit BuildingThe property must be a one-unit building that is primarily residential.
- Residential UseThe property cannot be modified in a way that would hinder its marketability as a residential property.
- Business UseThe property must have a space set aside for business use, such as a doctor’s office, beauty salon, or daycare facility.
- OccupancyThe borrower must occupy the property as their primary residence and be the primary owner-operator of the business located on the property.
Sources
- Fannie Mae Mixed Use
- Residential vs. Commercial Property Loan: What’s the Difference?
- Fannie Mae Mixed-Use Mortgage
FAQs
Can you buy a commercial property with a residential mortgage?
No, generally it is not possible to purchase a commercial property with a residential mortgage. Commercial properties require commercial property loans, which have different rules and terms compared to residential mortgages.
What are the requirements for a commercial property loan?
Commercial property loans typically require a business entity, minimum credit scores, a down payment of at least 20%, a debt-service coverage ratio of 1.25 or higher, and the property must be used for commercial purposes by the business obtaining the loan.
What are the terms and amortization of a commercial property loan?
Commercial property loans often have shorter terms (15 or 20 years) compared to residential mortgages, and they require a balloon payment at the end of the loan term.
What is a Fannie Mae Mixed-Use Mortgage?
A Fannie Mae Mixed-Use Mortgage is a residential mortgage financing program that allows for properties used for both residential and commercial purposes simultaneously. However, these properties must meet specific criteria, such as being a one-unit building that is primarily residential and having a space set aside for business use.
What are the benefits of a commercial property loan?
Benefits of a commercial property loan include building equity, potential for income generation, capital gains, and fixed and predictable payments.
What are the disadvantages of a commercial property loan?
Disadvantages of a commercial property loan include a higher down payment requirement, balloon payment at the end of the loan term, responsibility for property maintenance, and potential for market fluctuations.
What types of properties qualify for a commercial property loan?
Commercial property loans can be used to purchase or develop properties intended for commercial use, such as retail locations, office buildings, warehouses, restaurants, medical facilities, and housing developments.
What is the debt-service coverage ratio (DSCR)?
The debt-service coverage ratio compares the property’s net operating income to its annual mortgage debt service. A DSCR of 1.25 or higher is often preferred by lenders.