Residential or Commercial Loan - which is better?

[IOBA]

Hoping for more information/guidance.  What is the difference between a residential mortgage and a commercial mortgage?

We are planning to purchase a property.  A house with some land.

I have talked to a few lenders.  Here's my dilemma.

I can get a residential OR a commercial loan on the property.  

The lenders seem to want to focus on commercial loan only.  The property has the potential to make some money.  The current owners make about 3-4k a year from the property from raising animals.  My first year owning  the property - I'd probably make about 1k plus rent.  I would be renting the house back to them for 6-9 months.  After they move out, I could invest some money into the property and have a greater return the following year.  I think it would be too challenging to raise animals while they are living there.  And they don't want to assist with the animals at all.

I can't get the lenders (at regular banks) to give me a comparison between a residential loan and a commercial loan.

* may or may not require escrow (depends on how much is put down)

* interest rate only given to me for commercial loan, which was about 6%, 30 yr fixed

* may or may not require hazard insurance (home owner insurance) depending on the land value (if land is worth more than the house, no insurance is required)

* 90-120 days to close

* want to know everything I owe and own, even though I don't consider it an asset.  For example, they want to know the amount of the electric bill.  How much can I produce on the land?  I have two paid for vehicles.  I don't consider them an asset, but I must disclose them on the form.

* there would be a lien on the land until the mortgage is paid off

* an appraisal has to be done

It looks and feels like a residential mortgage with a more detailed check of assets and a longer period to close.

What is the difference between the residential and the commercial mortgage??

[StartingOver10]

IOBA, I can't tell you all the differences, but there are a couple of major differences between the two. To see all the differences, you would need to see the note that the lender is going to have you sign for the commercial loan for that particular property.

Here are some broad generalizations:

1) there are certain consumer protections you are entitled to with a residential loan that you do not get with a commercial loan (lending standards) so Google residential mortgage protection for consumers to get a more detailed answer for that part

2) the interest rate is usually higher and typically it has a balloon note in X years (5, 10, 15 yrs is common)

3) the interest may be adjustable tied to a more volatile index and the margin is higher (not good for you)

4) in many commercial notes all of your assets are cross collateralized (if they can get away with it). It is definitely a point of negotiation when you enter into a commercial loan.. Your goal of course is to not have any sort of cross collateralizing and theirs is to have you pledge everything. The language in the note and mortgage will address it.

There is more, but you get the idea.  

[Anonymous]

The residential loan is going to be a challenge if you include the land that is income-producing.  That's why you are only hearing about commercial.  Most people buy the homestead separately so that they can get a residential loan on it (you know, 30-year fixed with a rate in the low to mid 4s) and a farm and ranch loan for the remainder.  You might also be able to get a farm and ranch loan (not commercial but a third type of loan) depending on the area.

Scott Drescher

[DallasLoanGuy]

commercial is MORE money down and higher interest rates.

unless there are other implications(like taxes?) then residential is a better priced loan

[IOBA]

The current owners of the land do not want to provide tax returns that would show the land profits.  I don't blame them - it's tied to their personal tax return.  And I might learn that things are not exactly as they have said.  (I have caught a few things here and there.)

So going commercial just becuase the land CAN produce income is probably what I will have to do.

Any lenders that will do 0% down on a commerical loan?  I have assets (free and clear) that are valued at 2x the purchase price of the property.

If I do the commerical loan, how do I prevent them from attaching onto my other properties (like vehicles, house, IRA's)?

One of the lenders told me not to sell my other property.  Instead, he said, they could get it appraised and do a mortgage or a lein on it to equal my "down payment."   Is this advisable?

Thank you (in advance) for all replies.  

[DallasLoanGuy]

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@IOBA wrote:

The current owners of the land do not want to provide tax returns that would show the land profits.  I don't blame them - it's tied to their personal tax return.  And I might learn that things are not exactly as they have said.  (I have caught a few things here and there.)

So going commercial just becuase the land CAN produce income is probably what I will have to do.

Any lenders that will do 0% down on a commerical loan?  never heard of one.    I have assets (free and clear) that are valued at 2x the purchase price of the property.  easy. have your investment advisor create a real estate investment trust with those funds and use THAT to buy the property for cash.

If I do the commerical loan, how do I prevent them from attaching onto my other properties (like vehicles, house, IRA's)?

One of the lenders told me not to sell my other property.  Instead, he said, they could get it appraised and do a mortgage or a lein on it to equal my "down payment."   Is this advisable?

Thank you (in advance) for all replies.  

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[Anonymous]

Residential loans and commercial loans are very difficult to compare. What you are considering buying is considered a working farm. FHA, Fannie MAe and Freddie Mac do not lend on these types of properties. A commercial lender typically looks at the cash flow from the business to qualify a borrower so $3-$4000 a year would probably not qualify you for a loan either. I would try a " farm services" type of lender for this loan. They specialize in these types of loans.

[ezdriver]

Sounds to me like the lenders have determined that the property has higher value based on commercial use vs private/residential use. A commercial loan is based on the operating income that the property can produce plus the current land/improvements value.

A residential mortgage on the other hand is based on income/assets/liabilities/credit of an individual with the property used simply as collateral for the loan.