A commercial mortgage is a loan secured by income-producing real estate, structured around the loan amount, term, amortization and recourse. Lenders review the property, the borrower and the market before they approve it. This guide covers the structure of a commercial mortgage and the requirements most lenders apply.
How is a commercial mortgage structured?
Commercial mortgages are structured much like residential home loans, with set terms negotiated between the lender and the borrower, but a few points differ. The loan term is usually shorter. Commercial terms can range from five years to 20 years, while a 30 year term is common on a residential loan.
The amortization period often runs longer than the loan term. A loan might have a term of seven years but an amortization period of thirty years, so the monthly payments are set as if the loan were paid off over thirty years. That leaves a final balloon payment at the end of the term, which must be paid in full or refinanced before it is due.
Recourse is part of the structure too. On a recourse loan the lender can hold the borrower or a guarantor responsible if the loan defaults, while on a non-recourse loan the property is the lender’s only security. Rates vary by lender, property and loan terms. Daily benchmark rates are on our commercial mortgage rates page.
For more on how term, amortization and fees shape the cost of a loan, read our guide to commercial mortgage terms.
What do lenders review about the property?
Commercial mortgage financing is built around the loan to value ratio, which is the share of the property’s value a lender is willing to lend. That number depends on a range of factors, but mostly on how much risk the lender will accept. At Clopton Capital, loan to value maximums go up to 80%, which means a buyer needs a deposit of at least 20%.
The type of property also affects the down payment a lender asks for, along with the loan terms, the lender itself and market conditions.
What do lenders review about the borrower?
Lenders consider both your personal credit score and the credit score of your business. The better your scores, the better your chance of a low rate. Your credit situation also affects the down payment. Commercial real estate down payments generally range from 20% to 40% or more of the total property value. Conventional business loans often require a 25% down payment, and private commercial lenders occasionally accept 10 to 15%, though such loans are rare.
A down payment shows the lender that you are willing to take on part of the risk. You can always put down more than the minimum to lower the interest you pay over the life of the loan.
What documents do lenders ask for?
Lenders want paperwork that covers three things: the property, the income it produces and your own finances. Expect to provide personal and business tax returns, recent bank statements, a rent roll showing what tenants pay now and what you expect them to pay, records of the collateral, photos and a location map of the property, and a comparison with similar properties nearby.
Frequently asked questions
How long is a commercial mortgage term?
Commercial mortgage terms usually range from five years to 20 years, shorter than the 30 year term common on residential loans. The amortization period is often longer than the term, so a loan with a seven year term might be amortized over thirty years and end with a balloon payment.
What is a balloon payment?
When the amortization period is longer than the loan term, the monthly payments do not pay off the whole loan by the end of the term. The remaining balance is due as a final balloon payment, which the borrower must either pay in full or refinance before the loan comes due.
How much down payment does a commercial mortgage need?
Down payments generally range from 20% to 40% or more of the property value. Conventional business loans often require 25%, and private lenders occasionally accept 10 to 15%, though such loans are rare. The amount depends on your credit, the loan terms, the lender, the market and the property type.
What is loan to value?
Loan to value is the share of the property’s value that a lender is willing to lend. It depends mostly on how much risk the lender will accept. At Clopton Capital, loan to value maximums go up to 80%, which means a buyer needs a deposit of at least 20% of the value.
Have more questions about commercial mortgage financing? Contact Clopton Capital to learn more.
