Your Complete Guide to Commercial Mortgage Loans

Expert advice on rates, types, and how to qualify

Navigate the complex world of commercial real estate financing with professional guidance from industry experts.

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What is a Commercial Mortgage?

Financing Business Property

Commercial mortgages are specialized loans designed specifically for purchasing or refinancing income-producing properties and business real estate, with terms and structures distinct from residential mortgages.

Different from Residential Mortgages

Unlike residential loans, commercial mortgages feature larger loan amounts, shorter terms, different underwriting criteria focusing on property income, and specialized lenders with expertise in commercial real estate.

Business Growth and Cost Reduction

Commercial mortgage financing provides businesses with capital for expansion, stability through real estate ownership, potential tax benefits, and long-term equity building as property values appreciate.

Property Types Financed

Office

Retail

Multifamily

Industrial

Hotel

Self-Storage

Medical Office

Mixed-Use

Special Purpose

Types of Commercial Mortgage Loans

Conventional Commercial Mortgages

Traditional loans offered by banks and credit unions with competitive rates for borrowers with strong credit and established businesses.

  • Terms: 5-10 years
  • Amortization: Up to 25 years
  • LTV: 65-75%

Conduit / CMBS Loans

Commercial Mortgage-Backed Securities loans bundled and sold to investors, offering competitive fixed rates for stabilized properties.

  • Terms: 5-10 years
  • Amortization: 25-30 years
  • LTV: Up to 75%

Fannie Mae & Freddie Mac Loans

Agency loans specifically for multifamily and affordable housing properties with favorable terms and competitive rates.

  • Terms: 5-30 years
  • Amortization: Up to 30 years
  • LTV: Up to 80%

SBA Loans (7(a) & 504)

Small Business Administration loans with lower down payments, longer terms, and government guarantees for owner-occupied properties.

  • Terms: Up to 25 years
  • Amortization: Matches term
  • LTV: Up to 90%

Bridge Loans

Short-term financing to "bridge" gaps between immediate funding needs and permanent financing for acquisitions or renovations.

  • Terms: 6-36 months
  • Amortization: Often interest-only
  • LTV: Up to 80%

Hard Money Loans

Asset-based loans from private investors for borrowers who need fast funding or don't qualify for traditional financing.

  • Terms: 1-3 years
  • Amortization: Often interest-only
  • LTV: Up to 70%

Construction Loans

Short-term financing for ground-up construction or major renovations with draws based on completed construction phases.

  • Terms: 12-36 months
  • Amortization: Interest-only during construction
  • LTV: Up to 75% of completed value

Mezzanine Loans

Supplemental financing that sits between senior debt and equity, often used for high-leverage transactions and developments.

  • Terms: 3-5 years
  • Positioning: Behind senior debt
  • Combined LTV: Up to a90%

Preferred Equity Investments

Not technically a loan, but a form of capital investment that sits between common equity and debt in the capital stack.

  • Terms: 3-7 years
  • Return: Fixed preferred return
  • Position: Above common equity

How Commercial Mortgages Work: Terms & Payment Structures

Loan Terms

Unlike residential mortgages, commercial loans typically have shorter terms, ranging from:

3 Years 5 Years 7 Years 10 Years 15 Years 20+ Years

Amortization vs. Loan Term

Commercial loans often have amortization periods (15-30 years) that exceed the loan term, creating a balloon payment at maturity.

Loan Term Amortization Period

Payment Structures

  • Principal & Interest (P&I): Regular payments covering both principal and interest
  • Interest-Only: Lower payments covering only interest for a set period
  • Balloon Payments: Large final payment covering remaining principal

Recourse vs. Non-Recourse

Recourse Loans
Non-Recourse Loans
Borrower personally liable
Property is primary collateral
Lower rates, higher LTV
Higher rates, lower LTV

Prepayment Penalties

Most commercial loans include prepayment restrictions:

  • Step-Down: Decreasing penalty over time (e.g., 5-4-3-2-1)
  • Yield Maintenance: Compensates lender for lost interest
  • Defeasance: Substituting loan with securities yielding similar returns

Commercial Mortgage Interest Rates

Factors Influencing Commercial Mortgage Rates

Property Type

Multifamily and industrial typically receive the most favorable rates, while hotels and special-purpose properties see higher rates.

Location

Prime locations in major markets often qualify for lower rates than secondary or tertiary markets.

Loan-to-Value (LTV)

Lower LTV ratios (more equity) generally result in more favorable interest rates.

Debt Service Coverage Ratio

Higher DSCR indicates stronger cash flow relative to debt payments, resulting in lower rates.

Borrower Strength

Credit score, net worth, liquidity, and experience all impact available rates.

Market Conditions

Federal Reserve policy, inflation, and overall economic outlook influence base rates.

Common Rate Indexes

Index
Description
Used For
Prime Rate
Base lending rate set by banks
Variable rate loans
SOFR
Secured Overnight Financing Rate
LIBOR replacement
Treasury Bonds
U.S. government debt securities
Fixed-rate benchmarks
Swap Spreads
Difference between swap rate and treasury yield
CMBS loans

Estimate Your Payment

Monthly Payment: $0
Balloon Payment: $0
Total Interest Paid: $0

Qualifying for a Commercial Mortgage

Commercial mortgage qualification differs significantly from residential loans, with greater emphasis on property performance, business financials, and complex underwriting ratios.

Borrower Requirements

  • Business Credit Score: Most lenders require FICO SBSS scores of 160+ (scale of 0-300)
  • Personal Credit Score: Generally 650+ for conventional financing
  • Business Age: Typically 2+ years in operation preferred
  • Experience: Industry and property management experience often required

Down Payment Requirements

  • Conventional: 20-35% down payment typically required
  • SBA Loans: 10-15% down payment
  • Agency (Multifamily): 20-25% down payment
  • Hard Money: 30-40% down payment often required

Key Financial Ratios

  • Loan-to-Value (LTV): Property loan amount divided by appraised value, typically 65-80%
  • Debt Service Coverage Ratio (DSCR): NOI divided by annual debt service, minimum 1.20-1.25x
  • Debt Yield: NOI divided by loan amount, usually minimum 8-10%
  • Global Cash Flow: All business income vs. all debt obligations

The Underwriting Process

1

Pre-Qualification

Initial assessment of borrower and property eligibility based on preliminary information

2

Application

Full loan application submitted with supporting documentation

3

Document Review

Lender analyzes financial statements, tax returns, rent rolls, and property documentation

4

Third-Party Reports

Property appraisal, environmental assessment, and property condition report ordered

5

Underwriting

Detailed analysis of all financial and property metrics to determine loan approval

6

Approval & Closing

Loan committee approval, commitment letter issued, and final closing process

The Commercial Mortgage Application Process & Costs

Required Documents Checklist

Personal financial statement
Last 3 years of personal & business tax returns
Last 2-3 years of business financial statements
Year-to-date profit & loss statement
Rent roll (for existing properties)
Property operating statements (3 years)
Purchase agreement (for acquisitions)
Property photos and location details
Entity formation documents
Borrower resume or experience summary

Typical Timeline

Pre-qualification

1-3 days

Application to Term Sheet

5-10 business days

Due Diligence Period

30-45 days

Final Approval

5-10 business days

Closing

7-14 business days

Total process typically takes 45-75 days from application to funding

Common Commercial Mortgage Fees

Fee Type
Typical Cost
Description
Loan Application Fee
$1,000-$5,000
Non-refundable fee to process your application
Origination Fee
0.5%-2% of loan amount
Fee charged by the lender for processing the loan
Appraisal Fee
$2,000-$10,000+
Depends on property size/complexity
Environmental Report
$1,500-$6,000+
Phase I assessment, may require Phase II
Title Insurance
$2,500-$10,000+
Based on loan amount and location
Legal Fees
$3,000-$15,000+
Varies by transaction complexity
Broker Fee
0.5%-2% of loan amount
If using a mortgage broker

Refinancing a Commercial Mortgage

Common Reasons to Refinance

Managing Balloon Payments

Refinancing before a balloon payment comes due to avoid a large lump-sum payment at loan maturity

Lower Interest Rate

Taking advantage of lower market rates to reduce monthly payments and overall interest costs

Better Terms

Securing more favorable loan terms such as longer amortization periods or non-recourse structures

Cash-Out Refinance

Accessing equity in the property to fund renovations, other investments, or business expansion

The Refinancing Process

The commercial refinance process follows many of the same steps as the initial financing, with property performance history becoming a critical factor:

  1. Evaluate Current Loan: Review prepayment penalties, remaining term, and refinance costs
  2. Property Valuation: Determine current market value and available equity
  3. Compare Options: Shop various lenders and loan programs
  4. Apply for Refinancing: Submit application with updated financials
  5. Underwriting: Similar to original loan but with emphasis on property performance history
  6. Closing: Pay off existing loan and establish new loan terms

Cash-Out Refinance Considerations

A cash-out refinance allows you to tap into your property's equity by taking out a new loan for more than you currently owe. Key points to consider:

  • Most lenders limit cash-out to 70-75% LTV
  • Higher interest rates compared to rate-and-term refinances
  • Must demonstrate clear use of funds (typically business purposes)
  • May require additional documentation for the use of funds
  • Can potentially be structured as a second mortgage or mezzanine loan
Existing Loan
Property Value
New Loan
Cash Out

Commercial Mortgage Glossary

Understanding the terminology used in commercial real estate financing is essential for navigating the lending process successfully.

Amortization

The process of paying off a loan through regular payments over time, gradually reducing the principal balance while paying interest.

Balloon Payment

A large, lump-sum payment due at the end of a loan term, representing the remaining principal balance when the loan's amortization period exceeds its term.

Cap Rate (Capitalization Rate)

The ratio between a property's net operating income (NOI) and its market value or purchase price, expressed as a percentage.

DSCR (Debt Service Coverage Ratio)

A ratio that measures a property's ability to cover debt payments with its net operating income, calculated as NOI divided by annual debt service.

Debt Yield

A ratio calculated by dividing a property's net operating income by the loan amount, expressed as a percentage.

LTV (Loan-to-Value) Ratio

The ratio of the loan amount to the appraised value or purchase price of a property, expressed as a percentage.

NOI (Net Operating Income)

A property's income after operating expenses are deducted but before debt service and income taxes are paid.

Prepayment Penalty

A fee charged to a borrower who pays off a loan before its scheduled maturity date.

Recourse Loan

A loan that allows the lender to seek payment from the borrower's personal assets if the collateral property value doesn't cover the outstanding loan balance in default.

Yield Maintenance

A prepayment penalty designed to allow the lender to maintain the same yield as if the borrower had made all scheduled loan payments until maturity.

Ready to Finance Your Commercial Property?

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  • Expert guidance on loan selection
  • Competitive rates from multiple lenders
  • Streamlined application process
  • Personalized financing solutions

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