A commercial mortgage is a loan extended to a borrower keeping some property as collateral, another name for ‘security’ against repayment except that a commercial mortgage requires that the collateral should be a commercial property such as a building or other real estate owned by a business – residential real estate or buildings will not do for collateral.
There is a marked difference here between a residential mortgage and a commercial mortgage in that a commercial mortgage is taken by a business as opposed to an individual. The applicant for a commercial mortgage may be a partnership firm, incorporated business or a limited company- in a the case of a commercial mortgage it is more difficult to assess the credit worthiness of the applicant than it is in the case of a residential mortgage. With commercial mortgage laws stating that the creditors can only seize the property held as collateral in the case of a default in payment makes this kind of loan non-recourse in nature. After acquiring the collateral property the lender has no claim on the borrower whatsoever, this despite the fact that the entire loan was not able to be repaid by the property value for what ever reason.
In the United States commercial mortgages requires the borrower to repay just enough of the loan amount in order to repay the whole loan amount over a period of twenty to thirty years, the commercial mortgage terms may also call for what is called a ‘balloon payment’, which is a total repayment of the loan after a lesser time frame than what the loan was initially taken for. The lender will take this recourse if they feel there is some problem with the repayment ability of the borrower of that the collateral might be coming into some troubled waters; in this case the borrower in all probability will try to get the commercial mortgage refinanced by another commercial mortgage company.
Commercial mortgages thus have tow elements; the length of time allowed until the balloon payment can be resorted to and the amortization. Commercial mortgages can vary from five to thirty years. If a loan has a thirty year amortization and a ten year term it is known as a 30/10 loan. Residential mortgages do not have a balloon payment system and so can run the full length of their amortization, until, that is, the borrower decides to repay the loan in full – therefore a residential mortgage is known as a 30/30 loan.