Commercial mortgages : AN INTRODUCTION TO COMMERCIAL REAL ESTATE LOANS
Commercial mortgages or properties are everywhere, in our neighborhoods, in our cities, and on every corner.
There are presumably similarly the same number of business structures in the United States as there are single-family homes.
and in all likelihood similarly the same number of business land credits, as well.
Like private properties, business structures are assembled or obtained with acquired cash.
Cash obtained for the development, buy, or renegotiate of a business property is usually alluded to as a business land advance or business contract.
Commercial mortgages have nothing in common with single-family residential mortgages. They are like night and day.
Even the professionals who engage in the origination and underwriting of commercial mortgages are distinct in every way from those who work in the residential mortgage industry.
Regardless of whether you are a tenderfoot land financial spécialiste searching.
for your absolute first business land credit or a private home loan agent hoping to wander into the business contract financier business.
You should overlook all that you think about private home loans.
Terminology like “stated-income,” “full-doc,” “HELOC,” “good-faith estimate,” and “discount points” .
which are unique to residential mortgages, cannot be found in the lexicon of commercial mortgages.
The commercial real estate loan industry is very complex and takes years to master.
Be that as it may, acing the business doesn’t need to take years, particularly for the individuals who wish to get a head begin.
Learning how and where to find a commercial real estate loan is what this whole article is about.
and the commercial real estate loan industry and begins by defining the terms “commercial” and “mortgage” in the context of commercial mortgages.
Within this post you will find a discussion of the different types of commercial properties and commercial real estate lenders.
including an explanation of typical financing terms found in every commercial mortgage.
At the conclusion of this topic you will be introduced to the methods and terminology used in underwriting a commercial real estate loan.
What is a Commercial Mortgages?
The simplest definition of a commercial mortgage is basically this :
a loan for the purchase or refinance of a commercial property.
A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building, not residential.
However, to fully appreciate the complexity and broad use of the phrase, it is best to first separate the two words and define them independently.
Most people think that a mortgage is the same as a loan and often use these words interchangeably without realizing the difference.
The terms mortgage and loan have the same meaning in a colloquial
sense, but, technically speaking, the two are not the same thing.
A mortgage is actually a written legal document, referred to as a mortgage instrument, signed by a borrower who pledges his or her title to the property as security for the loan.
In other words, a mortgage is a written pledge by the borrower to the lender relinquishing the borrower’s interest in the title to the property in the event of a default of the loan.
The term “loan,” on the other hand, refers to nothing more than borrowed money.
The legal term for a mortgage lender is mortgagee, while the legal term for a borrower is mortgagor.
There are generally two types of mortgage instruments: mortgages and deeds of trust.
Both instruments create a lien against the title to the property and represent.
only a transfer of the borrower’s ownership interest in the property either to a trustee or to a lender; neither is a transfer of the title itself.
A lien is a legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation.
In layman’s terms, it is the right to take another’s property if a debt is not paid in full.
Not all states use mortgages.
For example, both California and Texas use a deed of trust to create liens, while other states, including North Carolina and Georgia, use mortgages.
Bear in mind we are talking about the type of mortgage instrument here.
For example, just because Texas and California use a deed of trust doesn’t mean that the lender is not creating a mortgage, as previously defined.
it’s just that different states have different names for the “mortgage instrument” itself.
States that use either a mortgage or a deed of trust are called “Lien Theory” states.
meaning that both mortgage instruments create a lien against the title to the property rather than transferring title to the lender.
Though both mortgage instruments create liens in the same way, it is the foreclosure process that sets them apart.
A deed of trust differs from a mortgage in that in many states the property can be foreclosed on by a nonjudicial sale held by the trustee.
A nonjudicial sale means that the trustee on behalf of the lender can go straight to the courtoise steps.
And conduct a foreclosure sale of the property without permission from any court.
The dispossession procedure can be a lot quicker for a deed of trust than for a home loan.
Foreclosure processes that involve a mortgage almost always require court approval before a lender can proceed with the sale of the property to satisfy the debt.
It is also much more time consuming and costly to foreclose on a property using mortgages.
States that allow the lender to actually possess or hold title to the property until the loan is paid in full under the old English common law system are called “Title Theory” states.
The best example to explain the concept of Title Theory is a car loan.
When a person buys a car, the lender actually holds the original title until the loan is paid in full and then returns the original paper title to the owner stamped “paid in full.”
There are only six states that still use the old English common law type of mortgage :
Connecticut, Maine, New Hampshire, North Carolina, Rhode Island, and Vermont.
In “Lien Theory” states, title to the property is actually held by the borrower for the benefit of the trustee and the lender until there is a default under the loan.
In the event of a default, the trustee then forecloses on the lien on behalf of the lender.
Mortgages are created only for real estate, which is why mortgages and deeds of trust are recorded in the real property records of county courthouses.
You will never hear a car loan, a business loan, a personal loan, or any kind of non–real estate debt referred to as a mortgage.
Mortgages today are exclusively used for both residential and commercial real estate loans.
which may explain why the home loan industry and residential brokerage firms prefer to use the word “mortgage” rather than the word “loan.”
Despite what may have become natural for you to say, teach yourself to start thinking like a professional.
and begin associating the word “mortgage” with the words “lien” and “deed of trust.”
In summary, if you really like using the term “commercial mortgage” .
Because it is natural or easy to say, always remember that what you are really describing is a commercial real estate loan.
If you look up the word “commercial” in the dictionary.
you will find that there are many definitions, depending on the context of the usage.
But what is crystal clear is that the word has no association with real estate in any way.
Defined Commercial mortgages
“Commercial” is derived from the root word “commerce,” which has more to do with trade and business than with real estate.
So what does the word “commercial” really mean when it is associated with mortgage or real estate?
In the context of this article, the word “commercial” can be best defined as meaning “not residential.”
Residential properties, as defined by Fannie Mae, are limited to single-family homes and multifamily dwellings of four units or fewer.
Such as duplexes, triplexes, and fourplexes.
It is because of this very narrow definition that we find the word “commercial” convenient.
Because if the property is not a single family home, a duplex, a triplex, or even a fourplex.
what other alternative do we have but to classify it as commercial?
So up to this point we can safely say what a commercial property is not.
What then is a commercial property?
As long as it doesn’t meet the Fannie Mae definition of a résidentiel property.
a commercial property can be any type of building or parcel of land used for any commercial purpose.
In other words, if it is not a single-family home, a duplex, a triplex.
Or a fourplex, then it is simply a commercial property.
Why is this significant?
It’s important because commercial properties and commercial mortgages are as vast as the oceans that separate the continents.
and this is where residential mortgage brokers and novice real estate investors underestimate the complexity of the industry.
Unlike the residential mortgage industry, which is largely regulated by Fannie Mae.
the commercial mortgage industry is fragmented and extremely inconsistent.
Commercial properties and commercial mortgages can be simple or extremely complex, depending on the property type.