While business funds and residential funds are similar in some ways. There are still some points which will make them different from each other. So, what are these differences that set them apart? Also, if you are a business owner what should you know if you are looking for a mortgage? Well, keep on reading to find all the answers to your questions.
Commercial business funds are for working capital. It is to buy real estate in connection with the business or to purchase inventory and equipment. The borrower can easily withdraw funds from the credit balance of the advance. It is through the revolving lines of credit. These are usually used to provide cash for the business over time. Also, term loans are typically used to establish a business, purchase real estate, and purchase inventory and equipment. Whereas, the residential fund borrowers have options to acquire term advances and equity lines of credit. In contrast to business funds, residential funds are based upon the value of homes. Also, these funds are for purchasing or building upon the value of residential properties. Also, term loans may be to refinance an existing mortgage or obtain additional installment funds based upon the value of the property.
Commercial funds are given to business owners to finance the growth of their businesses. Whereas residential funds are given to homeowners for mortgage financing and other owner-occupied residential reasons. For a business fund, the owner has to state the financial strength to the lenders. Also, the lenders approve the owner’s ability to earn a profit. In contrast, for a residential credit to get approval, the lender checks if the homeowner is credit-worthy. Also, the value of the property is sufficient to cover the amount of the advance.
The application process for both commercial business funds and residential owner funds is quite similar. As mentioned earlier, in the case of business, the lender will evaluate the income, existing debt, and credit history of the applicant. This is to determine the applicant’s ability to repay the credit. Whereas with residential funds, the lender will use the homeowner’s property as collateral for the credit. Therefore, the lender will request an assessment of the home to determine its value. In commercial advances, the lender will evaluate the applicant’s business plan if the funds will be used to establish a new business. Also, the lender will review the applicant’s business profile if the funds are to be used to develop an existing business. The lender may review the personal credit history of the business owner.
Commercial advances have a higher interest rate than residential ones. Also, they are consequently for a shorter term. This is because commercial mortgages have a smaller secondary business market. The maximum borrowing for a commercial mortgage is likely to be around 65 percent to 70 percent LTV (loan-to-value). Whereas a residential mortgage can be up to 95 percent LTV.
One of the issues is the down payment for this difference. Usually, for a residential advance, the down payment is negotiable. Also, it is very easy to get a mortgage with zero down payments if your credit is good. If your LTV ratio goes above 80%. In this case, all you may have to do is pay an LMI (Lender’s Mortgage Insurance). In the case of commercial funds, it is riskier than residential mortgages. Hence, you will need an LTV ratio that goes over 80%. Along with it, you will also need a 20% down payment. Moreover, if the business climate is strong you may be able to negotiate to bring it down at 10%.
Terms, Penalties, and Restrictions
The payment period on the mortgage for a homeowner is longer than a businessperson. Usually between 25 to 30 years. Also, a residential buyer will have more options due to the smaller monthly payments. In contrast, commercial advances will take from 5 to a maximum of 20 years. Also, the payments are larger here. Moreover, the repayment period for a residential advance will last only until the end of an advance. Whereas the one for the commercial fund is usually longer than the term of the advance. However, a commercial borrower may be able to have the advance repayment schedule customized to fit their particular requirements.
Here we are at the end. Since now you know the differences between business funds and residential funds, you can invest your money in the right place. With the correct information at hand, it is easier to make investments. Also, you can get the profit of the investment you make. If you do not have access to the correct information, you may have to suffer some losses. Therefore, research well before you decide to spend your money either in business or for residential purposes. After all, your hard-earned money should benefit you.