COMMERCIAL BANK LOAN
A commercial bank is a financial institution that receives deposits, offers checking accounts, provides loans, and offers financial products like certificates of deposit, and savings accounts for individuals and businesses. Commercial banks include known banks such as Bank of America, N.A., Trust Bank, N.A., and Wells Fargo Bank, N.A. These banks make money though the various services they offer, including interest on loans the bank makes to individuals and businesses.
For Purchases of a Residence
A consumer loan is available from Commercial Banks. Commercial Banks go through a rigid process when a Buyer seeks a bank loan. The loan application process involves applying for a loan to the bank. The bank will require a credit report that it will pull, and perform a background check on the applicant Buyer.
There are several steps involved in the process of obtaining a consumer loan to purchase a house. The first steps is to determine the purchase price you can afford. Seek pre-approval from the lender to understand what the bank is willing to loan you; a pre-approval is not a firm loan offer, and is contingent upon a lot of things including the house you find to buy and if it qualifies to the bank lender for the loan. After you know what you can afford, the search is on for the house. Once the house is chosen, and an agreement is reached between buyer and Seller and a Purchase and Sales Contract is signed, the next steps can begin. A buyer can meet with multiple possible lenders to try to find the one with the best offer. At this point, consider factors such as whether a VA (Department of Veterans Affairs) loan is possible, and whether to use an FHA (Federal Housing Administration) loan is available. Then, the mortgage application is submitted. From the lender’s side, the loan goes through its underwriting department where your application is reviewed, considered, and possible additional information or documents will have to be submitted by the Buyer. Once underwriting approves the loan application, the closing process can proceed. The Title Work is performed in preparation for the Closing. The Lender prepares its documents as part of the Lender Package. The Closing it then set, the Loan Proceeds are sent from the lender to the Title Agent where the Settlement Statement and other closing documents are concluded, signed, and the net purchase price is paid to the Seller and the Buyer received the title to the property.
Factors to Consider in a Consumer Bank Loan:
- Term of the Loan
- Interest Rate
- Term of the Loan
- Lender Closing Costs
For Purchases of a Commercial Property
A Commercial Loan is a loan for the Buyer to purchase real estate property where a business operates. It can be a Commercial Loan for a Buyer to purchase a multifamily property, to buy a strip mall, or vacant land to develop a restaurant on. It can also include a loan to purchase the real estate as well as the business operating at the real estate. It in effect is like two purchases; the real estate as well as the business operating there.
The steps involved in a Buyer seeking a Commercial Loan are similar to a Consumer Loan. However, there is normally more involved in the due diligence of the business and possibly the real property to the extent it involves the business operating there. The due diligence is where the Buyer inspects the business being purchased to make sure it is a suitable investment and is consistent with what the Seller was representing, such as the amount of inventory the business has or its gross sales volume. A construction loan is often involved in the transaction if the Buyer will be constructing a building on the purchased real estate property.
Residential Loan vs. Commercial Real Estate Loan
| Loan made to individual persons for use by the Buyer as a primary residence | The loans is usually made to a company such as a corporation or limited liability company and can involve a business operating at the property |
| Typically the loan is paid off in regular monthly intervals over a fixed period of time such as 30 years | The term to pay off is shorter such as five years to possibly twenty years |
| Loans made be up to 90% or sometimes 100% of the Purchase Price | Payoff requirements may have unique terms to satisfy needs of the Buyer and the Lender |
| Programs exist such as through the VA or FHA and even locally such as police associations to offer special rates and loan programs | Loans are typically only between sixty-five to eighty percent of the Purchase Price |
PURCHASE MONEY MORTGAGE LOAN
This is a situation where the Seller of the real estate agrees to finance the transaction instead of the Buyer paying cash or obtaining a loan from a Lender. Also known as seller-financing, the Seller and Buyer work out the terms of the payments, interest rate due on the debt, down payment amount required, and closing fees. There is still a Mortgage that is signed by the Buyer in favor of the Seller that secures the debt. Sometimes, a Purchase Money Mortgage is needed because the Buyer lacks the credit to obtain a Commercial Loan or the Buyer does not have the cash available for the down payment a Commercial Lender requires to approve a loan.
The Goods and the Bads to a Hard-Money Loan to Close:
- Closing costs may be lower or there may be none at all than with a Commercial Lender because the Seller typically does not charge the costs and have the expenses a commercial bank will incur when committing to a loan
- Down Payment amount can be set as agreed to between the Seller and the Buyer which can allow a Seller to get to a Closing and purchase the property even without having the Down Payment cash required by a Commercial Lender
- Buyers who otherwise cannot qualify for a Commercial Loan or are otherwise a high-risk borrower can reach agreement with the Seller to finance the transaction to close
- Closings can be set sooner than with a Commercial Lender as the closing and loan documents do not need to go through the time-consuming processes of a Commercial Lender
- Buyers may be more likely to default on their loan terms because they come into the transaction being a higher risk
- Payments to the Seller under the loan terms may be higher because a Seller financed transaction often involves shorter pay-back periods than a Commercial Lender
- Balloon Payment at the end of the Loan term are often required in a Seller-Financed transaction
HARD-MONEY LOANS
A Hard Money Loan is a loan that could be used when Buyers purchase an investment property (not for a property being used by the Buyer as their primary residence). A Hard Money Lender is a private company or an individual, not a Commercial Lender such as a ‘big bank’ like Bank of America, N.A., or Truist Bank, N.A., that provides Short-Term Loans known as a Hard-Money Loan. Typically, the loan approval process is much faster than with a Commercial Lender. The loan is secured by the property being purchased. Private Money Lenders typically have lower lending requirements. Whether a Hard Money Lender will agree to loan the money typically depends on the value of the property so they can confirm their loan is secured. Some negatives to a Hard-Money Loan include higher interest rates due to the higher risk involved. Moreover, the loan is usually required to be paid back in a short period of time such as two or three years. Often, there is a Balloon Payment due at the end of the loan term. Many people use a Hard-Money Loan when they expect to purchase the property and then either Refinance it later with a Commercial Lender or fix up the property and sell it as quickly as possible (Flipping the House), looking for a short-term gain on the sale.
Positives and Negatives to Hard-Money Loans:
Pros:
- Quick Closings
- Less Requirements to Close
Cons:
- Higher Interest Rates
- Higher Closing Lender Fees
- Equity Required in the Purchased Property
- Not Suitable for Long-Term Loans