Not all properties are created the same. While most residential homes are zoned residential, you may find a home that is zoned as both residential and commercial, or what is known as mixed-use. But, how is buying mixed-use property different than buying a residential property? Can I get a residential loan on a mixed-use property?
Here we take a look at the differences between traditional zoning and mixed zoning and how that can affect the ability to receive a conventional loan for the home of your dreams.
Key takeaways
- Mixed-use properties have multiple zoning classifications, like residential and commercial.
- Different types of loans are available for mixed-use properties, including government-backed, commercial, short-term, and residential mixed-use loans.
- Commercial mixed-use loans require a 25% down payment, a debt-service coverage ratio of 1.25 or higher, and are available for buildings in good condition.
- Government-backed mixed-use loans require a 680 minimum credit score, a 10-20% down payment, and are available for owner-occupied properties.
- Short-term mixed-use loans are used when other commercial loans aren’t available and require a minimum credit score of 600. Residential mixed-use mortgage loans are available for primary residences that have attached offices or studios used for business.
What are mixed-use properties?
When properties are built, they are typically zoned for either residential, commercial, rural, or industrial. However, in some cases, properties hold more than one zoning designation. For example, an apartment complex that also houses a gym or a commercial storefront that also has a residential home on the second and third floor. When a property offers a combination of these different zoning classifications, they are considered multi-use properties.
The construction of multi-use properties has grown in popularity and allows for the integration of different property types within a singular development. If you are self-employed or own your own business, these mixed properties allow you to combine your home and business within a single location. However, when it comes to mixed-use properties and finding a mortgage, there are some differences to consider.
Types of mixed-use loans
Mixed-use loans are available in four different categories: government-backed, commercial, short-term, and residential. The most commonly used loans for this property type are government-backed loans through the SBA or USDA. However, we will look at each type and how they can work for you.
Commercial mixed-use loans
A commercial loan is used typically for commercial properties, such as an office building or shopping center. You can also apply for commercial loans on a mixed-use property, and, unlike government-backed loans, there are no requirements for occupancy. Buildings, however, must be in good condition to qualify. These loans are typically 15-to-30-year loans with interest rates starting as low as 5%.
Eligibility and requirements
In order to qualify for a commercial mixed-use loan, there are certain criteria that you must meet. Because this is a commercial loan, there is no requirement for occupancy, but you will need to meet the following requirements:
- Security in the property – lenders will expect at least 25% down payment and the addition of property insurance
- LTV Ratio of 75%
- A debt-service coverage ratio (DSCR) of 1.25 or higher
- Lenders will check your business credit score but also require a personal credit score minimum between 660 and 680
- Minimum of two years in business
- May require additional collateral
Government-backed mixed-use loans
Government-backed mixed-use loans, such as through the SBA and USDA, are commonly used for mixed-use properties. The loans available are the SBA’s 7(a) and 504 loans and the USDA Rural Development business loans. These loans often offer lower interest rates on mixed-use properties because they are backed by the government. In addition, these loans allow up to a 90% LTV, helping to reduce the down payment requirement. However, they do have more stringent requirements when it comes to mixed-use property.
Eligibility and requirements
In order to be eligible for a government-backed mixed-use loan, the main requirement is that at least 51% of the property must be occupied by the owner. If your mixed-use property is intended to be your home residence as well as your business, this should not be a problem. Other additional requirements and eligibility include:
- 680 minimum credit score
- Down payment between 10-20%
- Clean financial history
- A debt-service coverage ratio (DSCR) of 1.25 or higher
- Jobs must be created – for the SBA 504 loan, you must show how the commercial part of the property will create jobs
- Business must have a net worth of less than $15 million
- LTV Ratio of 80-90%
Short-term mixed-use loans
Short-term mixed-use loans can include commercial bridge loans and hard money loans. When purchasing a mixed-use property, these loans are often used when a property does not qualify for other commercial loans due to the disrepair of the property or for buyers that are working to compete with all-cash buyers and need faster funding time for the loan. These loans have higher interest rates, ranging between 5% and 16%, and much shorter terms, averaging six months to six years.
Eligibility and requirements
Short-term mixed-use loans do not have any occupancy requirements but can be more difficult to obtain. Some of the common requirements include:
- Minimum credit score of 600
- A debt-service coverage ratio (DSCR) of 1.25 or higher
- At least two years in business or at least two to three past rehab projects
Residential mixed-use mortgage loans
In addition to commercial loan options, residential mixed-use loans from Fannie Mae, Freddie Mac, and FHA are also available. However, there are strict requirements that focus more on the residential portion of the property, restricting the amount of the property space that can be used as residential. The types of properties that typically qualify for these mixed-use loans include residential homes with attached offices or studios that are used for business, such as a professional office, beauty salon, or daycare facility.
Eligibility and requirements
Because the goal of these loans is to help people achieve a primary residence, the property must be the borrower’s primary residence. In addition, the borrower must also be the primary owner and operator of the business located on the property. Other requirements include:
- Traditional Fannie Mae/Freddie Mac requirements of 620-640 credit score,
- DTI ratio no higher than 45%
- No more than 25% of the property can be dedicated to commercial use for Freddie Mac/Fannie Mae
- No more than 49% of the property can be dedicated to commercial use for FHA
Advantages and disadvantages of mixed-use developments
As an investor, there are many advantages and disadvantages to purchasing mixed-use properties.
Pros
- Less risk to borrowers: Because of the diversity provided by a mixed-use property, you don’t face as big a risk if you lose a tenant, as income can still come in from other tenants/renters
- More convenient for consumers: mixed-use properties allow for a wide range of businesses, allowing for more consumer traffic
- Mixed-use can be more environmentally friendly: Mixed-use properties allow for the combination of residential and commercial businesses together, in less land. In areas with multiple mixed-use buildings, there is less land dedicated solely to commercial space and customers can walk from home to business, reducing the automobile pollution in the area.
Cons
- Deals can be complex: Mixed-use loans can be time-consuming and complicated to complete. In some cases, financing can take more than a year.
- Properties can be hard to manage: Because your property may include both residential and commercial tenants, property management can be challenging.
- Loans are often hard to find: Not all banks and lenders are willing to offer mixed-use loans, meaning it may take time to find financing that will work.
A mixed-use property can become your dream home
If you are looking at a property that includes both a residential and commercial aspect, you may feel frustrated when trying to find a loan. While mixed-use loans are available, they are not always easy to find and can be very frustrating.
At Hero Home Programs, we understand this frustration and are here to help. For more information, contact us online today.
