What’s the Difference Between Residential and Commercial Mortgages When It Comes to Foreclosures?

If you live in New York and are interested in real estate investing, you may be able to use a commercial mortgage on an investment property. But if things go wrong, there are specific differences between the foreclosure process of residential and commercial mortgages.

Residential vs. Commercial Mortgages

Residential mortgages usually offer better rates and terms, so commercial mortgages tend to be only used for commercial ventures. However, there can be areas of overlap:

• When you want to buy a residential structure (up to four units in the building) to use as a rental property
• When you want to hold your primary residence in your company’s name
• If you want a short loan term – Typically commercial loans are shorter term; 1-5 years is not uncommon
• If you have a tough time getting personal financing due to bad/no credit or lack of documentation. Commercial mortgages do not involve as much documentation as long as the collateral value and property income can accommodate the loan.

The Negatives of Using a Commercial Mortgage for Residential Property

While no one gets a mortgage with the assumption that it will end in foreclosure, the risks are much higher when dealing with a commercial mortgage used for residential property. The most important disadvantage is that commercial loans lack many of the protections that are present for residential mortgages when it comes to foreclosures.

• Shorter Foreclosure Notices – Unlike residential mortgages which require a 90-day pre-foreclosure notice (covered under NY RPAPL Section 1304) commercial loans can give you as little as 20-30 days’ notice.
• No Mandatory Settlement Conferences – NY residential mortgage law (NY RPAPL Section 3408) requires that your lenders sit down with you and try to come to a good faith settlement including mortgage modification. Commercial mortgages do not mandate these conferences, so while your lender may be open to negotiation, they are not forced to by law.
• No TILA /RESPA Requirements – TILA (Truth in Lending Act) and RESPA (Real Estate Settlement Procedures Act) are mandatory disclosures regarding the costs of a residential loan being obtained. Commercial loans do not have the same protections.
• Different Usury Limits – The interest rate for residential loans in New York is not allowed to be over 16%. For commercial loans of over $100,000.00, your interest may not be greater than 8 percentage points above the prime rate. Loans over $2.5 million are not subject to New York’s usury statutes.
• Limited Bankruptcy Options – Chapter 13 is only available for personal bankruptcy. With a commercial loan, you are only able to choose either Chapter 7 (liquidation) or Chapter 11 (reorganization).
• Choice of Law and Choice of Jurisdiction Clauses – During residential foreclosures, the judicial proceeding and law applied must always be local to the property (for example: a New York property would have a foreclosure action initiated in the county it is in and use New York State law). With a commercial foreclosure, if you live in New Yorkand own property in a different state, your lenders can choose which jurisdiction suits their needs better.
• Mandatory Binding Arbitration Clauses – In your commercial loan agreement, your lender may have added an arbitration clause that mandates using an arbiter of their choosing. Unlike decisions made in the state and federal court systems, it is very difficult to appeal an arbitration award, and they are functionally immune from review.
• No Need to De-Accelerate Upon Payment of Arrears – With a residential mortgage in foreclosure, if you start paying back your debt, the foreclosure process stops. With a commercial mortgage, your lender can continue trying to foreclose on your property.

What to Do Next

If you have taken out a commercial mortgage on a residential property and are afraid you may find yourself involved in foreclosure, you need to reach out to New York foreclosure lawyer Ronald Weiss immediately. After a free consultation, he can tell you what you need to know about fighting a commercial foreclosure lawsuit and help you get your case started. Call 631-271-3737 and take the first step to a fresh start.