Commercial vs. Residential Real Estate Lending – A quick comparison

If you are a property owner thinking about acquiring an apartment building and finding some real estate lending options, you’re not alone. As the country has shifted from ‘homeownership’ to ‘rentership’ coming out of the Great Recession, the interest in and profitability of multifamily investment have increased. But what exactly is the difference between buying a house and buying an apartment community? Well, that opens up the question of what exactly is the difference between commercial and residential real estate?

Rental or Multifamily?

In the real estate lending space, rental properties with five units and up are financed by commercial loans, while rentals with five units and under can be financed by a residential loan. When you hear someone in the commercial loan industry refer to multifamily, they are referring to a property with more than five units. A residential real estate lending broker may call a two-family property ‘multifamily,’ and while they are technically right, it is somewhat of a misnomer that can lead to confusion. The difference comes down to how a loan is sized during underwriting.

Commercial loans are primarily sized and underwritten based on an asset’s projected net operating income (NOI). Residential loans are underwritten based on the creditworthiness and income history of the individual purchasing the property. So with commercial loans, eligibility has a lot to do with property performance. 

First time commercial or multifamily borrowers also need to consider prepayment penalties, which are fees incurred for paying off a mortgage loan before it reaches maturation. These prepayment fees are not typical in the home mortgage world. If you take out a loan for your primary residence, and win the lottery the following year, you are going to typically be able to pay off the remaining balance of your home loan without incurring a fee. This is not the case with a commercial or multifamily loan. 

The real estate lending institution has issued a loan collateralized by your commercial or multifamily asset expecting a set amount of interest revenue. If you are going to pay off your mortgage early, your lender is going to need to obtain that interest revenue through a fee to keep their balance sheet tidy or satisfy investors.

If you have a question about real estate lending you should request a quote today. We’ll then connect you with an expert loan officer who has experience with your specific asset class and metropolitan statistical area (MSA). Send us an email at to get started!

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