Commercial or Home Loan

tasmania, australia, store-196828.jpg
>Is this a commercial or home loan?
Posted by: neeste Jan 23 2004, 07:43 PM
My parents are retiring and want to sell their retail store. It is located in the heart of a small downtown. It consists of 3,000 square feet on both first and second floors. The top floor has one apartment that is in good condition. There is another apartment that has not been lived in for years and requires updating.

I would like to sell my current house and buy the building. My goal would be to keep the payments close to what I am paying now. This would be our primary residence. I would expand the upstairs living quarters into one large space. Until such time as I could find a retail business to rent the first floor, I would use it as a recreation area, with ping pong table, exercise equipment, etc. for the family.

When I do find someone to rent the first floor, the rent would help in paying for upcoming college costs for my teenage children.

I thought I had a good plan, until we went to the bank. My plan was based on a home loan rate with a 30-year mortgage at 6%. The bank tells me that this currnt home loan rates are even lower, but that this is a commercial loan. That rate is 7 1/2%. And, this commercial loan would have a 5-year ballon with a 15-year amortization rate. This has blown my plan out of the water. I have already found out that property taxes and insurance on a building are higher than I had expected, but this is the final blow.

Why can’t I get a home interest rate on this building? And, is there any other advice you could offer? I can’t believe I can borrow money for a house at one rate, but can’t get the same rate if I choose to live in a building!
Posted by: loanuniverse Jan 23 2004, 08:55 PM

Why can’t I get a home interest rate on this building? ………. I can’t believe I can borrow money for a house at one rate, but can’t get the same rate if I choose to live in a building!

Well sorry to hear this, you are not the first visitor to find out that some properties do not qualify for regular financing. I have bad news and good news.

First the bad news: Considering that I am not a residential lender, I believe that the bank is probably right. While you can get conventional type financing for multi-family residences up to 4 units, your particular property has a “retail component” making it “mixed-use”. Like I said, I am not a residential lender, but 3,000 Sq. Ft. of retail space might make that building more than 50% commercial. Frankly, I am not sure if they allow even 10% of the total building to be other than residential. My guess is that they don’t.

Once you know how the government encourages home ownership through the creation of a secondary market for residential mortgages and other programs, it is easy to understand why those rates are cheaper. The problem is that there are parameters that a property must meet in order to qualify, and being solely residential is one of them.

The good news: Which can be considered the other advice that you were asking for is the following:

1- The rate that you were quoted {7.5%} is a little higher than what you could get with some negotiation caution: “this would only work if the request is strong enough. This means: there is enough debt repayment capability and good loan-to-value”

2- The amortization is a bit short, work for a 25 year or at worst settle for a 20 year. Fifteen years is a bit strong. The same caution can be said as for the interest rate, if you have leverage use it. Heck, even if you don’t go ahead and try…. The worst thing they can say is no.

3- The kind of institution where you take your request has a lot to do with the kind of product you are offered. Look for a lender that does a lot of commercial property loans, they can probably offer better terms.

4- If I was looking at this loan, I would want to know if your personal income, which is not dependent on the potential rental income from the retail space or the 2nd apartment is sufficient to cover the payments and provide a comfortable cushion.

Hope this helps
Posted by: neeste Jan 24 2004, 07:15 AM
Loanuniverse, thank you for your reply and suggetions. I will give them a try.

I hope you realize what a great service you are providing here. I searched the internet high and low for advice on this mixed-purchase loan and your’s was the only one I found. And reading other posts, I see others seek similar advice, often involving much greater monies. Thank you for your time and effort.

Author: Commercial Loan Underwriter