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Mixed-use loan fundamentals for small-business owners 

  • You’ll need a commercial loan if more than half the property is for commercial use.
  • Fannie Mae, Freddie Mac and other agencies purchase or back certain loans.
  • Expect to pay higher interest rates and fees if you need a commercial real estate loan.
  • Commercial loans may not have strict standards about owner occupancy.
  • VA loans may require substantial cash reserves for ongoing monthly costs.
Small-business owners may look to purchase a multiunit property for a variety of reasons. Maybe they want to eliminate their commute by living and working in the same location. Maybe they’re seeking investment-property income by leasing space to tenants.
To complete this type of purchase, you may need to find a lender that finances mixed-use facilities. These kinds of properties combine residential and commercial use under one roof. And there are plenty of things to know about smaller mixed-use properties of two to four units, as they have different funding requirements than multifamily properties of five or more units.

Residential or commercial?

One of the fundamental steps to obtain a mixed-use loan for your small business is to define its primary purpose. If more than half of the property’s square footage is for commercial use — including non-owner-occupied residential units — you’ll need to obtain a commercial real estate loan. This is important because commercial loans typically have higher interest rates and fees compared to residential home mortgages. They may also include a lengthier closing process if the lender requires items like an environmental indemnification, tenant lease agreements and rent rolls, or a personal guarantee from the business owner.
Home-purchase loans on properties with up to four units are available through a variety of lenders and loan programs. These loans usually have longer terms of 15 to 30 years, and they’re more likely to be of the fixed-interest, fully-amortizing variety. In contrast, commercial loans often have hybrid interest structures, in which an adjustable rate replaces the fixed rate after the first few years. And if the loan isn’t fully amortized, the borrower may need to make a large balloon payment at the end of the repayment term.

Where to find funding

When you’re seeking to purchase a mixed-use facility with two to four units, there are several options to speak with lenders about. Following are some of the most common loan programs for financing.

Commercial real estate loans

This may be the most flexible option for a small-business owner, as lenders may not have owner-occupation requirements. Community and regional lenders that have more knowledge of the local property market may be the best path to a commercial loan. Loan limits on smaller mixed-use properties range up to $5 million, sometimes more. The loan-to-value (LTV) ratio is usually 80 percent or less, meaning a substantial down payment may be required. Fixed interest rates are usually somewhat higher than with home loans. Terms can be short, sometimes as little as a year or two if you’re working with a hard money or bridge lender. Lenders may have lower standards for a borrower’s FICO credit score and may waive prepayment penalties.

Conventional loans

Fannie Mae and Freddie Mac, the two major government-sponsored enterprises (GSEs), purchase loans on mixed-use properties if a professional appraisal deems the property to be residential in nature. This means that no more than 25 percent of the property can be used for commercial purposes. The property can have only one residential unit and the borrower must occupy it. The borrower must also own and operate the attached business, and may not modify the property in a way that negatively impacts its marketability as a residential property.

FHA loans

The Federal Housing Administration offers two programs that pertain to smaller mixed-use properties. Both require at least 51 percent of the property’s square footage to be an owner-occupied residence, and a minimum down payment of 3.5 percent of the loan amount is required. The 203(b) program is the FHA’s standard loan for residential properties of up to four units. It is a better conduit for mixed-use financing today as the agency in 2015 raised the limit on nonresidential usage from 25 percent to 49 percent. The 203(k) program is useful for borrowers who wish to rehabilitate the property, as it funds $5,000 or more in renovation costs. You cannot use those funds to rehab work on any of the commercial space.

VA loans

This may be the best option for a small-business owner who has served in the military. The U.S. Department of Veterans Affairs backs purchase loans on mixed-use properties of up to four units, as long as the owner uses at least one unit as their primary residence. When a lender calculates your personal income, however, they won’t count proposed rental revenue unless you have prior experience as a landlord. Also, a six-month cash reserve is required on three- and four-unit properties to fund principal, interest, tax, insurance and association (PITIA) dues.

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