Virtually everyone dreams of owning a home. Besides the pride and satisfaction in knowing that you never again have to worry about a place to lay your head, there is the obvious fact that buying a home is a valuable investment. Investing in a house is an excellent way to diversify your portfolio. You can use your house as leverage to buy other properties or as collateral to get loans for other investments.
When it comes to buying a house, the first question on everyone’s lips is, “where do I get the money from?” Unlike stocks or cryptocurrencies, you can’t invest in property with “little change.” You need massive capital, which you often don’t have lying around idly. This is where loans and mortgages come in. You can collect loans from banks, insurance companies, credit unions, and other financial institutions to fund your house. Of course, these loans require that you fulfill certain conditions and pay interest on the initial sum you collected. However, the pros often outweigh the cons, especially when you get your house cheaply and it appreciates in value over the years. Now, there are different types of loans available, one of which is commercial loans. Here, we’ll discuss what commercial loans are if you can use them to fund your house purchase, and other options for buying a house. Keep reading!
Commercial loans are debt-based funding organizations take to finance operational costs or major capital expenditures. There are several commercial loans, each with unique terms and conditions. Generally, commercial loans can be classed as short-term, payable within 12 months, or long-term, that last for longer periods. Although commercial loans are mostly used by medium to large-scale businesses, small businesses can also obtain them to fund immediate costs, provided they meet the credit score requirement.
There are several types of commercial loans, including;
We’ll be focusing on commercial real estate loans, which is the type of commercial loan taken to buy a property
As the name implies, real estate loans are loans taken to purchase or invest in physical properties. Real estate loans may be in the form of mortgage loans, in which the loan is secured by the property being purchased, or non-mortgage loans, in which the loan is unsecured.
There are generally two types of real estate – residential real estate and commercial real estate. Commercial real estate refers to any property with income-generating potential. Financial institutions typically treat a property as commercial if at least 51% of that property is directed towards the owner’s business. The following property types qualify for commercial real estate loans;
Commercial loans are typically used for financing, including acquiring, developing, and constructing these properties.
Before taking a commercial real estate loan, you need to understand the different types of these loans and the terms associated with each to understand what works best for you.
Term loans are the most basic type of commercial loan. Here, the bank lends you some money with agreed repayment terms. The loan may be short term (less than 12 months), medium term (between 1 and 3 years), or long term (more than three years). The major requirement of this loan type is that 51% of the property is occupied by your business. These loans also require you to have a FICO credit score of 700 or more and to have been in business for at least one year.
A term loan may be backed by collateral, in which case the banker bears less risk and issues lesser interest rates. However, if the loan is not backed by collateral, the bank bears more risks, resulting in a higher interest rate. The interest rate on a term loan may be fixed or variable, and the bank places fewer restrictions on the money, allowing you to use it for whatever you want in the business.
Hard money loans are short-term, high-interest loans commonly obtained as a last resort to finance a property. These loans are rarely given by banks but rather by private investors willing to take risks based on the value of a commercial property. Hard money loans offer you a quick way to raise money, as the investor is typically unconcerned about your credit rating or income. However, this quick money comes at a great cost as these loans have interest rates between 10-18% and typically last less than 24 months. In addition, the upfront fees you pay are costlier.
While hard money loans may seem risky for the lenders, they usually have the backing of commercial property as collateral. If borrowers default on payment, the lender can take over the property to recover their money. For a borrower, hard money loans are ill-advised unless there is a guarantee of flipping the money in time.
Bridge loans are relatively short-term, high-interest rate loans that provide quick cash flow for a business to meet immediate obligations until they can secure financing. Bridge loans can be considered a milder and safer version of the hard money loan. These loans are provided by banks with interest rates of up to 9% and terms of up to three years.
Bridge loans have shorter approval times and often require that you have a credit score of at least 650, cover a 20% down payment, and provide collateral (property or inventory) to back the loan. Bridge loans essentially help you bridge the gap between a period of no finance to a period of adequate financing. You may consider a bridge loan in a case where you need money to finance the purchase of a new house while waiting for a current property to sell.
As the name sounds, construction loans are medium-term (18 months to three years) loans taken to cover the cost of constructing a property. Construction loans help you cover the cost of materials and labor when building structures like offices, retail fronts, industrial facilities, multi-family rental units, etc. When taking a construction loan, you can use the property on which you are constructing as collateral.
A blanket loan is a single real estate loan that can be used to finance multiple properties at a time without any individual property affecting the loan terms. Blanket loans allow real estate investors to acquire multiple properties quickly and make money off those properties without incurring any penalties. On the downside, blanket loans are complex, difficult to get, and have higher interest rates and down payments.
For example, if you identify 10 different properties on the market, you can collect a blanket loan to acquire and refurbish all 10 f those properties. Depending on the loan terms and the agreed release clause, you can sell off some of those properties to individual buyers and then use the money to invest in other properties rather than pay the loan. Your blanket loan is still valid, provided you hold some of the property covered under the loan.
These are short-term (typically between 6 and 18 months), high-interest (typically between 12 and 18%) real estate loans provided to investors looking to renovate a property and flip it for a profit in the short term. These loans are a type of hard money loan provided to investors looking to acquire a property on auction or foreclosure. The loan offers extra money to renovate said acquired property and then flip it for a profit.
Commercial loans are different from other types of loans. If you want to finance a property using a commercial loan, there are certain characteristics of this loan that you must be aware of, especially in comparison to residential loans. They include;
Now to the main question in this piece, “can I use a commercial loan to buy a house?” Well, the simple answer is, it depends. Commercial loans are specifically made to finance the purchase or development of commercial properties, i.e., properties used for business-related purposes rather than residential ones. This means that such property must generate income for you, the owner, either through business income, capital gains, or rentals. Many properties may be classified as commercial properties, including multifamily housing units. However, if you intend to get a regular house for you and your family to live in, then you would typically not qualify for a commercial loan.
Now, even if you could get a commercial loan to buy a house, you’d have to consider its worth. Commercial loans typically have higher interest rates, shorter terms, and lower loan-to-value (LTV) ratios than residential loans, thereby impeding your cash flow. However, you could consider taking a commercial loan for your private house under the following scenarios;
Rather than taking a commercial loan to finance a private property, you could try an alternative such as a non-QM loan.
Non-qualifying mortgages do not meet the Consumer Financial Protection Bureau’s “ability to repay” rule set for qualified mortgages. Thus, lenders can offer you loans without vetting your finances or offer you amounts higher than what you would be able to pay back.
Non-QM loans are highly risky for the lender, who, rather than verifying your income with tax returns, W2s, and paystubs, might use your bank statements to calculate your income to qualify you for the loan. The lender may also offer you great flexibility through interest-only payments, negative amortizations, or a longer loan term. Conversely, you’ll likely pay higher rates, APRs, and even upfront fees and points that aren’t permitted on qualified mortgages. However, you will be able to settle your loan over longer periods. An advantage of non-Qm loans is that you can access them within days of a major credit event like bankruptcy.
If you have found your dream home, but do not qualify for a standard mortgage, then a non-QM loan is right for you. A non-QM loan may provide a temporary lending solution until you meet regular mortgage standards and can refinance to a traditional loan. You can benefit from a non-QM loan if you;
For the best non-qualifying mortgage rates to buy an investment property, contact Aurum $ Sharpe today.
Although difficult, you can indeed buy a house with a commercial loan. However, with its short-term and high-interest rate, a commercial loan may not be your best option to finance a private property. Instead, you should consider a non-QM loan offering more flexible terms. Need to discuss available options on non-qualifying mortgages, then contact me today at 9177404325.
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