Commercial Vs. Residential Loan for Mixed-Use

Commercial Vs. Residential Loan for Mixed-Use
Commercial Vs. Residential Loan for Mixed-Use (Image: mixed-use property,

Mixed-use properties are most often found in cities, but also exist in the suburbs. Composed of at least two units, they often contain four to eight units, sometimes many more in large projects. It is very safe to state that all owners of mixed-use properties would like access to residential financing because interest rates are lower and the time to repay is longer than with most commercial loans.


Mixed-use properties typically have one or two units that are commercial--tail store, office, restaurant, or other small business. The remaining units are usually residential, in the form of apartments for rent. Many of these properties will contain the small business on the first floor with the residences above or, sometimes, behind the commercial unit. Larger projects might have retail on floor one, office space on floor two and residential units above on one or more floors.


If there are more than four total units, commercial loans are almost always necessary because most residential financing options are available for one to four family properties only. Five units and above usually require some form of commercial financing, even if there is no commercial unit(s) involved. You can find some "hybrid" types of mortgage loans available for five- to eight-family properties if you search. More than eight units, however, normally requires commercial apartment building financing.


Residential mortgage loans are normally available in fixed and adjustable rate varieties. Repayment periods extend to 30 years--with a few options extending to 40 years. Downpayment requirements typically range from 3 percent (FHA) to 20 percent for most residential loans.

Commercial financing are usually adjustable rate loans, with adjustment periods as frequent as monthly. Minimum downpayment levels are usually 25 percent to 35 percent. Repayment periods usually run from 10 to 20 years.

As you can see, securing residential financing for a mixed-use property can be much less expensive than the commercial variety. Unfortunately, in most situations, you will not have the option to apply for residential loans.


Shopping around for residential financing typically means you might save some money on interest rate, closing costs and points. Yet, most lenders will offer similar terms. This is not true in the commercial lending industry. Banks and other lenders typically offer rates and terms that fit their target loan volume and profit levels. This more "flea market" approach to lending dictates that you shop around extensively to find the best current terms.

Because you will usually pay more for the commercial loan you need to finance a mixed-use property, it behooves you to examine all local or national lenders to find the best combination of rates and repayment terms.


The size of the loan you need for your mixed-use property may have an effect on the terms you're offered. If you can convince a lender to offer residential financing options, the size of the loan, unless it is quite high (more than $500,000), should have little effect. However, if you need hybrid or pure commercial financing, the size and the loan-to-value (LTV) will often affect the terms you can find. This occurs primarily because of the "risk factor." The risk level of commercial vs. residential properties is historically quite different. Commercial loan delinquencies and defaults are usually much higher than residential loans, particularly owner-occupied properties.


If you have a simple two-unit mixed-use property, even if you live in the residential portion, you will be challenged to find residential financing terms. Most mortgage lenders are part of the residential loan secondary market, which prohibits mixed-use properties as acceptable collateral.

However, you can search for those lenders (probably local institutions) that still hold some mortgages in their "portfolio" (their book of loans). You can try to convince them that you deserve residential rates and terms and they may (emphasize the "may") agree. Should they need more loans to satisfy their current goals, they may offer you residential terms, particularly if your credit is quite good.

If unsuccessful, search for one of the hybrid loans that are typically a good "middle ground" option, with rates and terms less volatile than pure commercial loans.

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