3 Top Differences Between Commercial and Residential Lending

We’ve noticed an interesting trend in 2019. This year, half of our commercial lending webinar attendees have described themselves as being residential mortgage pros!

Clearly, residential loan officers are interested in pursuing commercial lending as a diversification tactic for their business.

The problem is that the commercial real estate landscape is unique in several key ways.  Having residential mortgage experience isn’t enough – originators must expand their knowledge base and acquire an additional set of skills.

Don’t worry, the transition from residential to commercial is not as difficult as you might think.  At Silver Hill Funding, LLC, we often see residential loan officers make the jump to commercial and grow their pipeline.

If you’re considering commercial mortgage lending as a diversification tactic, take a minute to review some of the main differences between residential and commercial loans.


1. Property Types

Let’s start with a basic difference between residential and commercial lending: the properties themselves!

A commercial property is generally defined as real estate that is used for business activities. In many states, residential property containing more than a certain number of units may also qualify as commercial for tax purposes.

Unlike residential homes, which can all look alike within a given neighborhood, the commercial properties located along a single city block may all appear unique and serve separate purposes.

Just think of the differences between office, warehouse, retail, and apartment properties.  They have very little in common, but each are considered to be commercial real estate.


  • Devote some time to learning the ins and outs of the commercial property types commonly found in your market. Note which types are easier to close, and which types are likely to present challenges.  As an example, environmental concerns often make it difficult for borrowers to secure funding for automotive properties.
  • Understand that the complexities involved with commercial properties cause the typical loan transaction process to take longer than you’d expect in the residential arena. Traditional lenders may take several months to close commercial loans, though non-bank alternative lenders are often able to shorten the process.

2. Qualification

The old saying is true – while residential lenders focus on qualifying the borrower, commercial lenders focus on qualifying the property.

Of course, commercial lenders qualify borrowers as well, but their underwriting teams spend a significant amount of time determining the subject property’s ability to generate revenue.

This is where Debt Service Coverage Ratio (DSCR) comes into play.  DSCR is calculated by taking a property’s Net Operating Income (NOI) and dividing it by debt service (principal and interest payments).

The goal for underwriters here is to determine whether a property generates enough revenue to adequately cover the repayment of a loan.


  • Before you start prospecting for commercial business, take a moment to familiarize yourself with the commercial lending underwriting process.
  • Once you understand how lenders review commercial loan requests, pass your knowledge on to prospective borrowers. If they’ve only secured residential loans in the past, they may not understand why lenders require certain documentation or why the underwriting process takes longer than they might have expected.

3. Loan Term

The most common term for residential mortgages is 30 years.  However, commercial mortgages typically have term lengths of 5, 7, or 10 years.  This is primarily due to the increased risk associated with commercial loans.

As a result, commercial borrowers who want to hold on to their property must refinance their mortgage on a fairly regular basis.  This can be a good thing for originators who specialize in creating strong relationships with their clients – there is an opportunity for repeat business that doesn’t exist with residential borrowers.

Note: While some commercial borrowers welcome the flexibility that comes with short loan terms, others would rather secure a long-term solution with a fixed rate.

That’s why Silver Hill Funding offers a 30-year fixed rate commercial loan.  This type of solution is rare in the small-balance commercial mortgage industry, but it meets a need brokers commonly come across when they speak with prospective borrowers.

  • Focus on creating long-term relationships with commercial clients. If you provide them with a remarkable lending experience, they will likely come to you for their future refinances.
  • Keep Silver Hill’s 30-year fixed rate solution in mind when discussing loan requests with your prospective clients. Many borrowers may not know this option is even available to them.

Taking the Next Step

Our team at Silver Hill has helped thousands of residential originators break into commercial lending.  They can help you, too!

Reach out to your Regional Manager today to learn how you can quickly become a commercial mortgage pro.  You can also create a free web account and get instant access to marketing material you can use to promote your commercial expertise.