Understanding Commercial Mortgage Financing

If you are an experienced real estate investor, you may be ready to take on a commercial mortgage. However, it is important to understand that these loans are not the same as residential ones.


Commercial mortgages typically require a more rigorous application process and have different terms than residential mortgages. This article will outline four key differences between the two types of financing:

Interest Rates

Interest rates associated with commercial mortgage financing are higher than those of residential mortgages. This is because the underwriting process is stricter and lenders need to assess creditworthiness more thoroughly when lending to a business. Furthermore, commercial loans come with more fees than personal mortgages. These may include an arrangement fee, a commitment fee, a valuation fee and legal fees. In addition, commercial mortgages require a larger deposit than personal loans.

However, the interest payments are tax-deductible, which can help small businesses to manage their cash flow and reduce their overall tax burden. This makes them a cost-effective source of financing for many business owners.

The interest rates of commercial mortgages are influenced by many factors, including the economy and the creditworthiness of the borrower. Some lenders offer a fixed rate for up to 25 years, while others have variable rates that fluctuate with the market. In addition, some lenders index their commercial mortgages to a prime rate, which is offered to the most creditworthy borrowers.

When selecting a lender, be sure to shop around and get quotes from several different providers. The more options you have, the more likely you are to find a loan with a competitive interest rate. Additionally, it is important to look for a business lender that has experience working with real estate.


Commercial mortgages are long-term loans with terms of up to 30 years. They are secured by a first lien on the property and may be structured as a fixed or variable rate. These loans are often structured as nonrecourse or recourse, with the latter requiring that the borrower personally guarantee the debt in the event of default.

Most commercial mortgages are made to business entities such as corporations, funds, trusts or limited partnerships. These entities must meet certain financial standards in order to qualify for the loan, such as a minimum credit score and a strong cash flow. They also need to show that they can manage the debt service coverage ratio (DSCR), which determines whether the lender will grant a commercial mortgage or not.

Some lenders offer a range of commercial mortgage loans that can fit your business needs, including bridge and permanent financing. These loans are typically used for new construction or renovations, and may be either fixed or variable rates. Permanent commercial mortgages are usually amortized over 25 years, while bridge financing is typically interest-only and has a much shorter term.

Commercial mortgages require extensive paperwork and due diligence. Lenders typically check a borrower’s credit score and bank statements, and they may commission and review third-party reports. They also evaluate the property’s sponsor and legal borrowing entity. They may also assess a property’s risk, using factors such as its location and condition.


Commercial mortgages are used to buy commercial properties, such as office buildings or warehouses. These loans are typically longer than consumer mortgages and require a higher credit score. In addition, they typically have more stringent requirements for collateral and business income. They are also more expensive to process and take months to close.

Commercial loan rates and terms vary by lender, but the most common are commercial mortgages and bridge financing. These types of loans can be used to cover short-term needs, such as when the lease for a commercial property expires or to bridge gaps in long-term funding. They can be structured for both owner-occupied and investor properties, and they may be secured by either cash or a pledge of assets.

There are many different types of commercial mortgage loans, and some are more complex than others. Conventional commercial mortgages are backed by FDIC-backed enterprises and require a personal guarantee from the borrower. They also typically require more comprehensive underwriting, including a review of the borrower’s global cash flow and business tax returns.

To qualify for a traditional commercial mortgage, the lender will want to see that you have a strong business credit report and a good debt service coverage ratio (DSCR). Lenders typically look for DSCRs of 1.25 or higher, and they are more willing to lend money on a lower DSCR if you can show that your business will generate sufficient revenue to repay the debt.


When borrowing money to buy commercial property, businesses will often pay loan fees. These fees are charged by lenders to cover their costs associated with processing the loan. They are typically assessed based on several criteria including the loan amount, property location and execution type. Lenders will also assess a borrower’s creditworthiness to determine whether they can afford the monthly debt service of the commercial mortgage loan.

In addition to these fees, borrowers may be required to pay a survey and appraisal fee for the property. These fees can add up to significant amounts and should be considered when evaluating commercial mortgage loans. Lenders will also require that the property generate sufficient income to cover the debt service. This will be measured using a property-specific metric or by comparing the business’s current and expected cash flow to a standard industry ratio.

Obtaining a commercial real estate mortgage can be a complex process. To make the best decision, borrowers should research the market and consider a variety of factors, including interest rates, repayment terms and property location. It is also recommended to start with local and regional banks, credit unions and mortgage brokers, as they can provide a better understanding of the local market. The loan market is highly diversified, and there are many types of commercial real estate financing available.