Commercial mortgage means to pledge the property which is being used for commercial or business purpose rather than the residential purpose. This refers to the property being used for making money than used for dwelling purpose. The commercial property includes-

• Offices
• Apartment building
• Hospitals
• Retail shops
• Shopping complexes
• Gas station
• Cinema halls

The list is endless and includes anything that is being used to make money. In this case the borrower may not be a single entity but most of the times a partner ship, incorporated business or a limited company. So in such cases proper worth of the borrower is very difficult and complicated to assess.

Commercial mortgages are most of the times nonrecourse type of debts i.e. in the case of non repayment or dropping in prices of real estate the borrower is not liable and lenders can utmost seize the mortgaged property.

Like residential mortgages here also one has to satisfy various criteria’s for the mortgage banks. The method for receiving commercial mortgage is same as that of residential mortgage. The borrower has to produce various documents in front of the lender.  Creditors require credit history reports to ensure whether the borrower will be able to repay the monthly installments. Loans on commercial mortgages are highly dependable on the earning potential abilities of the property; most of the creditors would like to know the type of business running and long term financial plans of the borrower to know if the property will be able to pay for itself. Some lender may even apply restrictions on the usage of property in certain ways and for various business types but this is solely case dependent and should be inquired well before applying for mortgage. It would be better if you seek advice for these complex matters from someone who is into this field since years and has good mortgaging experience.

The lenders usually calculate debt service coverage ratio (DSCR) to know if the borrower seeking loan is an ideal case to whom the loan should be given. DSCR is usually between 1.1-1.5 for most of the financial institutions. It is calculated by dividing net income by mortgaged amount (including interest) or the value of property with the net income potential. For example if the person is earning $100,000 and paying mortgage amount of $70,000 then debt service coverage ratio after calculating $100,000/70,000 will be 1.42  which qualifies the borrower for the mortgage loan and in a way proves that the person will be able to repay the loan.
The commercial mortgage loans can be received for –

• Buying premises or land for business
• Extension of existing business
• Commercial investment i.e. property to be sold later or bought for the purpose of leasing it later
• Business start- up financing.

If you are buying property for investment purpose then make it sure if it a right deal. You should do the market analysis before reaching to any conclusion. Find out for the sale and rental history of the neighborhood. Also keep in mind while investing that will the property be able to pay for itself or is it a right and wise decision to buy this property. For example if you are buying a resort or a holiday home which is going to be occupied for few months only and will be remaining vacant for most of the times then think twice that is it a fair deal and will your resort be able to compensate for whole year.

Now the one important factor while choosing a lender is the rate of interest he is charging. Few of factors affecting rate of interest are amortization period, quality and location of property, environmental factors in that area, credit rating, credit exposure, annual income records. These above mentioned factors affecting rate of interest are in control of the borrower to some extent. But few other factors which are in control of lender or not even in his control and affecting the rate of interest are bond market, market capitalization rate, market size, economic conditions etc. .

As a customer you should take sufficient time to shop around for fair deals and should research and survey well before reaching to any conclusion.