The Basics of Commercial Mortgages
A commercial mortgage is a type of loan that uses real estate as security for repayment
. This type of mortgage differs from residential mortgages in the sense that only commercial properties such as: acquiring commercial land or built up property, expanding existing facilities, refinancing existing debts, development of commercial properties, etc are accepted as collateral and businesses have to be incorporated partnerships, limited companies, etc, to be eligible to take them.Because of the other existing laws and practice, they are mostly nonrecourse in nature, meaning that the lender can only seize the property but has no further claim against the borrower for any other deficiencies.
Most real estate loans require a monthly repayment over a period of time and a big severance on expiration of the loan balloon payment. This characterises any commercial mortgage - the period of time until the balloon payment (the term) and the periodic repayment schedule. There is a trend where owners of such properties attempt to refinance the loan before that period or sell off the property.
The conditions for offering such loans are more complicated than that for residential mortgage. In addition to having a good creditworthiness and investing a significant portion of money to the purchase, the borrower must be able to show a satisfactory debt service coverage ratio or the ratio of funds available to the loan repayments. The terms differ depending on the type of business the borrower is running or intends to run and the type of land or premises among other things.
Guarantees for commercial mortgage loans are commonly designed to be based solely on the characteristics of the property not on the credit characteristics or the borrower. This empowers the lender to seize the property - even in event of bankruptcy, should the borrower not keep the terms. In the case of residential mortgages, it would be difficult for the lender to sell off properties when bankruptcy cases are pending in court.
The Basics of Commercial Mortgages
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