Commercial vs Residential Loans (Which is better?)Oct 16, 2021
What are the pros and cons of doing commercial loans and residential loans? If you're looking to build a real estate property, you'll need to take loan terms and lengths into account when deciding on your approach...
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Interest rates with a bank are about four-ish percent as we post this. Hard money is going to be close to 10%. With a couple of points on the front. Yeah, a couple of percentages of your loan amount.
So we've got our land, it's developed, it's ready to build on. What about construction financing? What thoughts do you have there?
I think when people hear of construction finance or construction loan, if they haven't been through it, they get a little bit nervous, it's a little bit foreign or unknown.
But once you've been through the process and understand it, it's not as scary or intimidating. But typically what you can plan on is a construction lender gonna want to see at least 25% down, and you're gonna plan on some buying cost, or closing cost.
So you need to understand, okay, what's in that buying costs, closing costs, just like with any other loan that we're talking about here. A lot of times in the buying costs, you're gonna see an interest reserve account, you can either pay on that monthly, a lot of times, or it could be paid up upfront.
That's how we do it, we collect 12 months upfront, and we have that health and interest reserve account. So when you're getting a construction loan, it's interest-only plan on paying either monthly payment for that loan or upfront, there's gonna usually be a 1% origination fee, maybe more, you're gonna see appraisal fee, closing costs, things like that.
I think it also depends on are you gonna have to go commercial Are you gonna going to be able to do residential, right, depending on the number of doors. We've done projects where anywhere from one to four doors, we can get to residential, and then five and above, you need to go commercial. Commercial terms are usually not as favorable, but they still do work. Sometimes that process is a lot harder. But through commercial, you can also do it in the name of an LLC, where to go residential, it has to be in your personal name.
That's right. Going residential. Once again, this is a bank, and they have very set requirements. When we say going residential, we're talking about these conforming Fannie Mae, Freddie Mac loans. And there is a very specific set of criteria that you have to go through and you either meet it or you do not very rarely Is it is it blurry. One thing that happens to me a lot is when I send somebody to a commercial lender that's been used to dealing with residential, they always call me like 60 days later mad, like these commercial guys are clowns like, well, there's not a set of criteria, right?
This is a bunch of old bankers that collect all your financials and get in a committee eat some donuts and talk about does we like this guy? and black and white answers don't always come out of that meeting.
So commercial is there's like a thought that's expressed a lot of people say, I want to do a commercial deal because they don't care about my credit score my financials, they just care about the deal. Not true at all. But what is true, they care a lot more about the deal. on a residential loan. It is chases, credit score, and debt to income ratio, purely that does that deal on a commercial deal. It's, is Chase an idiot? Okay, he's not great. Is he financially viable? Is the solvent? Great. Now, how does this deal look?
Because it doesn't matter how good you look if the deal doesn't look good. It has to stand on its own.
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