Residential mortgages (1-4 units) have standard terms consumer protections and qualification based on personal income. Commercial mortgages (5+ units or non-residential) work very differently.
Commercial loans focus on property income not personal income. They typically have shorter terms (5-10 years) with balloon payments and higher interest rates.
Understanding the difference helps you choose the right financing for multi-family and investment properties.
Key Differences
Residential: 1-4 units, 30-year fixed available, consumer protections (TRID, ability-to-repay), lower rates, qualified by personal income. Commercial: 5+ units, 5-10 year terms with balloons, fewer protections, higher rates, qualified by property NOI.
Qualification
Residential: lenders verify your income assets and credit. Commercial: lenders analyze the property's net operating income debt service coverage ratio and your experience as an investor.
Terms
Residential: 15-30 year amortization, usually fully amortizing. Commercial: 5-10 year term, 20-25 year amortization, balloon payment at end. You must refinance or sell when the term ends.
Rates
Commercial rates are typically 1-3% higher than residential. However commercial loans have no prepayment penalties in some cases and interest rates may be negotiable based on property quality and borrower strength.
When to Use Each
Use residential for 1-4 unit properties you plan to hold long-term. Use commercial for 5+ unit apartment buildings, mixed-use properties, or when you need higher loan amounts.
Hybrid Properties
Properties with 1-4 units can sometimes qualify for commercial loans if they are investment properties. Mixed-use properties (retail + residential) typically require commercial loans. Duplexes and triplexes qualify as residential.