In this episode of Get Real Wealthy Season 2, Quentin talks about the differences between getting a residential mortgage and a commercial mortgage loan.
Quentin says that when you are getting mortgages for your rental properties, they're going to look at the debt coverage ratio on the actual rents that you get, your income, credit history, tax records from the last few years, etc. So, in the residential space, it involves a lot of paperwork. Commercial properties on the other hand are very different, as you would get a mortgage on commercial property because it is a business. They look at whether the building supports the loan on the property or not. If it does, they'll give you a mortgage based on how much that building can support. If you're looking at a conventional lender, like a regular bank, they can give you a loan, perhaps with a debt coverage ratio of 1.1, based on the net operating income of the building. Commercial loan-to-value ratios generally fall into the 65% to 80% range.
These lenders would look at things like your credit report, net worth, etc. As different lenders have their own criteria, you should consult with your banker or mortgage broker. He adds that typically, the building takes priority in commercial, and in residential, it's the person that takes priority. In conclusion, he says that depending on what you're doing – commercial or residential, it's going to depend on either the building or more on you, depending on the type of mortgage that you're getting.