In real estate, a mixed-use property is one that contains both residential as well as commercial space within its interior walls. A commercial property is an income producing property and can be as varied as a gift shop to a doctor’s office. To finance a commercial property, a commercial loan is needed. These loans are typically shorter term and come with higher rates and fees compared to a residential loan.
A residential loan is one that finances a property someone will use as a residence, either a primary residence or for a rental property. Independently, residential and commercial loans are relatively simple. But when properties contain a little bit of both, it can be a bit more complicated. But there are some very competitive options without having to go the commercial route.
Conventional loans underwritten to Fannie Mae or Freddie Mac can be an option as long as a few guidelines are met. The first being the loan amount. A conventional mixed-use loan must be no greater than $484,350 or as high as $726,525. Another important consideration is how much space is dedicated to commercial use compared to residential. Conventional guidelines require there be no more than 25 percent of the usable space dedicated to commercial activity.
If the building has 15,000 square feet of livable space then the commercial area is limited to 3,750 feet. Think of an apartment building with a café on the first floor. These types of loans also ask the owners occupy the property as a primary residence and operate the business(s) located within the building. The best terms for a mixed use property are reserved for conventional loans and should be the first option to consider.
Another option is with an FHA loan. Just like a conventional loan used for mixed-use, FHA loans require the owners to occupy the property as a primary residence. That of course is requirement for all government-backed loans. With an FHA loan, more space can be allotted for commercial, up to 49 percent of livable space.
One important question many ask is if the income from the commercial activity can be used to help qualify for the purchase. The answer is yes as long as the borrowers have owned an operated a similar business in the past for at least two years. Again, this is a common requirement. The same goes for using rent from the other units to help qualify. There needs to be a two-year documented history.
Another aspect of note is making sure there are similar properties in the area. When a lender evaluates an application for a loan, there needs to be evidence the property is marketable. This is validated by identifying similar mixed-use properties in the area. This is accomplished with an independent property appraiser. If a scenario does not have similar sales in the area, is not owner occupied and the borrower needs the income from the commercial space and rental properties, a traditional commercial loan is the answer.