A commercial mortgage is a loan secured by business property—office buildings, retail spaces, warehouses, or apartment complexes with five or more units—rather than your personal residence.

The basic structure resembles a residential mortgage: you borrow money, the lender places a lien on the property, and you repay over time. But the terms, the approval process, and what lenders actually care about are fundamentally different. A bank lending on commercial property is betting on the building's income potential, not just its resale value. That changes everything about how much you can borrow, what interest rate you'll pay, and how long you have to repay.

Commercial mortgages typically run 5 to 20 years, compared to the 15 or 30 years common for homes. Interest rates are usually higher because the lender's risk is greater—commercial properties are harder to sell quickly if you default, and their value swings more sharply with economic cycles. You'll also need a larger down payment, usually 20 to 30 percent of the purchase price, versus 10 to 20 percent for residential property.

Key Takeaways

  • Commercial mortgages require 20 to 30 percent down and carry shorter loan terms (5 to 20 years) than residential mortgages, with higher interest rates reflecting greater lender risk.
  • Lenders evaluate commercial property based on the building's income—rent collected, occupancy rates, and tenant quality—not primarily on comparable sales or your personal credit.
  • You will need detailed financial documents: tax returns, profit-and-loss statements, rent rolls, and often a professional appraisal specific to income-producing property.
  • Commercial loans often include a prepayment penalty if you pay off early, and many require a personal may provide that makes you liable if the business cannot repay.
  • Loan terms vary widely by property type, location, and lender; shopping across banks, credit unions, and commercial lenders is essential because rates and structures differ significantly.

How lenders evaluate commercial property differently

A residential lender asks: Is this house worth what the buyer is paying? Will it hold its value? A commercial lender asks: How much cash does this building generate, and is that cash flow enough to cover the loan payment? The difference is profound. Your personal income and credit score matter far less than the property's ability to produce revenue.

Lenders use a metric called debt service coverage ratio (DSCR). This is the property's annual net operating income divided by the annual loan payment. Most lenders want a DSCR of at least 1.2 to 1.25, meaning the building generates 20 to 25 percent more income than needed to cover the debt. If a building generates $100,000 per year in net income and your loan payment is $75,000 per year, your DSCR is 1.33—acceptable to most lenders. If the DSCR is below 1.0, the building does not generate enough to cover the payment, and most lenders will decline.

This is why the property's rent roll—a detailed list of every tenant, lease term, and monthly rent—matters more than your personal tax return. Lenders also scrutinize occupancy rates. A building that is 70 percent occupied is riskier than one at 95 percent, even if both are owned by the same person. They will ask about lease expiration dates too: if half your tenants' leases end in six months, the lender knows your income could drop sharply.

Documents you will need to gather

Commercial lenders require substantially more paperwork than residential lenders. You will need at least two years of the property's tax returns and profit-and-loss statements, showing actual income and expenses. If you are buying a property that is currently leased to tenants, you will need the rent roll and copies of the actual leases. Lenders want to see the terms—how long each lease runs, what happens when it expires, and whether tenants have options to renew.

You will also need a professional appraisal, but not the kind used for residential property. Commercial appraisals use the income approach: the appraiser estimates what the property should be worth based on the income it generates, using market data on cap rates (the ratio of net operating income to property value). This appraisal typically costs $1,500 to $5,000 depending on property size and complexity.

Personal financial documents matter too, but secondarily. Lenders will ask for your personal tax returns (usually two years), a personal financial statement showing assets and liabilities, and a personal credit report. They are checking whether you have skin in the game and whether you have a history of paying obligations. But a strong DSCR can sometimes overcome a weaker personal credit profile, whereas the reverse is rarely true.

Down payment, interest rates, and loan terms

Commercial mortgages typically require 20 to 30 percent down. Some lenders will go as low as 15 percent for strong properties with excellent DSCR, but 25 percent is more common. This is substantially higher than residential mortgages, which often accept 10 percent or less. The larger down payment reflects the lender's view that commercial property is harder to liquidate if the borrower defaults.

Interest rates on commercial mortgages are usually 1 to 3 percentage points higher than rates on residential mortgages of the same term. If a 30-year residential mortgage is at 6.5 percent, a 10-year commercial mortgage might be at 7.5 to 8.5 percent. The exact rate depends on the property type, location, your DSCR, your credit, and current market conditions. Rates also vary by lender type: banks, credit unions, insurance companies, and specialized commercial lenders often price differently.

Loan terms are shorter. Most commercial mortgages run 5, 7, 10, or 15 years, with 10 years being common. Some lenders offer 20-year terms, but these are less frequent. A shorter term means higher monthly payments but less total interest paid. Many commercial loans also include a prepayment penalty—a fee if you pay off the loan early. This might be 3 to 5 percent of the remaining balance if you pay off in the first three years, declining over time. Lenders impose this because they want to lock in the interest income.

Personal guarantees and what they mean for you

Most commercial lenders require a personal may provide, meaning you personally promise to repay the loan if the business or property cannot. This is different from residential mortgages, where the lender's recourse is limited to the house itself. With a personal may provide, the lender can pursue your personal assets—bank accounts, other property, wages—if the commercial property generates insufficient income to cover the debt.

Some lenders will negotiate a limited may provide, where you are liable only up to a certain amount or only under specific circumstances. Others require a full, unconditional may provide. If you are buying with a business entity (an LLC or corporation), ask the lender whether they will accept a may provide from the entity alone or whether they require personal guarantees from the owners. This is a negotiable point, though lenders are more likely to accept entity-only guarantees for larger, stronger properties.

Types of commercial lenders and where to shop

Commercial mortgages come from several sources, and rates and terms vary significantly. Traditional banks offer commercial mortgages but often have stricter DSCR requirements and higher down payments. Credit unions sometimes offer more flexible terms, particularly if you are a member. Specialized commercial lenders and mortgage brokers may have access to portfolio lenders—banks that keep loans on their own books rather than selling them—and these lenders sometimes accept lower DSCR or different property types.

Insurance companies and pension funds also originate commercial mortgages, typically for larger properties ($5 million and up). SBA loans (through the Small Business Administration) can finance commercial real estate if the property will house your business, though these have their own requirements and typically cap the loan at $5 million. Hard money lenders and private lenders offer commercial mortgages with faster approval but higher rates, usually when traditional lenders decline.

Shopping across multiple lenders is essential. A rate quote from one bank may be 0.5 to 1 percent higher than another's, and terms (prepayment penalties, DSCR requirements, personal may provide scope) vary widely. A mortgage broker can shop multiple lenders at once, though they charge a fee (usually 0.5 to 1 percent of the loan amount) and may have relationships with only a subset of available lenders.

Interest-only periods and balloon payments

Some commercial mortgages include an interest-only period, typically the first 3 to 5 years. During this time, you pay only interest; no principal is paid down. After the interest-only period ends, the loan converts to a fully amortizing schedule (principal and interest) for the remaining term. This lowers your payment in the early years, which can help if the property is newly leased or still stabilizing occupancy.

Many commercial mortgages also include a balloon payment at the end of the term. Instead of the loan being fully paid off after 10 years, you might owe a lump sum—perhaps 50 to 70 percent of the original loan amount—at maturity. This structure lowers your monthly payment but requires you to refinance or sell the property when the balloon comes due. If property values or interest rates have moved against you, refinancing can be difficult or expensive. Always understand the balloon amount and maturity date before signing.

Frequently Asked Questions

What is the difference between a commercial mortgage and a business loan?

A commercial mortgage is secured by real estate and uses the property's income to determine how much you can borrow. A business loan is typically unsecured or secured by business assets (equipment, inventory) and is based on the business's overall creditworthiness and cash flow. Commercial mortgages are usually larger and have longer terms.

Can I get a commercial mortgage if the property is not yet generating income?

Most lenders require the property to be stabilized—meaning it has a history of actual income and occupancy. If you are buying a vacant building or one with low occupancy, lenders may require a higher down payment, a lower loan amount, or a co-signer with strong financials. Some lenders will consider pro forma (projected) income if you have a signed lease from a creditworthy tenant.

What happens if I cannot refinance when the balloon payment comes due?

If you cannot refinance and cannot pay the balloon, the lender can foreclose on the property. This is why it is critical to understand the balloon amount and maturity date upfront and to plan for refinancing well before the due date. Market conditions, interest rates, and your property's performance all affect whether refinancing is possible.

Do I need a real estate attorney to close a commercial mortgage?

It is strongly recommended. Commercial mortgages involve more complex documents than residential mortgages, and the terms—personal guarantees, prepayment penalties, balloon payments—have serious consequences. An attorney can review the loan documents, explain your obligations, and sometimes negotiate terms on your behalf.

Can I use a commercial mortgage to buy a multi-unit apartment building?

Yes. Buildings with five or more units are typically treated as commercial property, not residential. The financing process is the same as for office or retail: the lender evaluates based on rental income and DSCR. Buildings with two to four units may be financed as residential mortgages, depending on the lender.