Residential Vs. Commercial Financing – The Difference

By Elli Davis, October 20, 2011

Blue And Pink Piggy Banks by Ken Teegardin

The very first thing you have to realize about the difference between residential and commercial financing is that commercial real estate is represented by more than just shops, warehouses and machine shops. The margin between residential and commercial real estate can be quite blurry. Peter Kinch offers an interesting comparison.

Different lenders have different criteria of what is a residential and what is a commercial property. While a single unit, duplex, and triplex are always considered residential, a four-plex may cause some banks to raise their eyebrows. However, it usually passes as residential. With a five-plex, you need the help of a good mortgage broker to help you find a lender.

A six-plex is almost impossible to finance as a residential property, and so is a seven- or eight-plex. These properties are considered commercial by lenders. What does this mean for a borrower? A lot.

When you buy residential property, lenders focus their investigation on your person. They look at your income, credit history, etc. The property becomes the second priority. When purchasing commercial real estate, the process works vice-versa. Banks and other lenders will first closely investigate the property – the price versus its commercial potential, followed by an examination of the borrower.

While as a residential property buyer you can predict your interest rate with reasonable accuracy, with commercial property, this is more difficult. The appraisal process is also more difficult and costly; your lender will ask for fees, and so will your broker. Moreover, you will usually need a Phase 1 Environmental Site Assessment, which costs around $3000 and takes several weeks.

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