A real estate loan, which is also referred to as a mortgage, is commonly used by homebuyers to finance real estate. When approved, borrowers sign a legal document (known as a mortgage note) that promises to repay the loan, with interest and other costs over a period of time.
Last Updated Date: May 16, 2022
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A real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property. Real estate loan refers to any income-producing real estate that is used for business purposes; for example, offices, retail, hotels, and apartments. In other words, business entities formed for the specific purpose of owning and operating commercial real estate. The business entity purchases commercial property, leases out space, and then collects rent from the businesses that operate within the property. The financing for the venture, including the acquisition, development, and construction of these properties, is accomplished through commercial real estate loans.
As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources. Like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers. The most popular residential loan is the 30-year fixed-rate mortgage, CRE loans are typically shorter. The terms range from five years (or less) to 20 years, and the amortization period is often longer than the loan term. For example, a lender might provide a loan with a term of seven years and a 30-year amortization. The borrower makes monthly payments during the seven years. The monthly payments are determined as if the loan were being paid off over 30 years followed by one final “balloon” payment composed of the entire remaining balance on the loan. Lenders consider the nature of the collateral (the property being purchased); the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans.
Here are the most common types of real estate loans:
Permanent Loans are first mortgages on a commercial property. A permanent loan must have some amortization and a term of at least five years written into the contract.
Small Business Administration Loans are written by traditional and non-traditional lenders but are guaranteed by the SBA. There are several different SBA loans that cater to different types of borrowers, the most popular being the 7(a) loan.
Bridge Loans provide a short-term first mortgage loan on a commercial property typically with a six-month to three-year term. Bridge loans are typically obtained when a borrower is waiting for longer-term financing or attempting to refinance an existing obligation.