Mortgage education
Commercial Real Estate Financing: A Practical Overview
Commercial real estate financing works differently from the home loans most people know. If you're moving from residential into commercial — or financing a business property for the first time — here's the practical overview.
How commercial loans differ from residential
The biggest shift is what the loan is judged on. A home loan focuses heavily on you — your income, your credit, your DTI. A commercial loan focuses more on the property and its ability to generate income. Terms differ too: commercial loans often have shorter terms, may amortize over a longer period than the loan actually runs (leading to a balloon payment), and typically ask for a larger down payment.
The key metrics lenders use
A few numbers drive most commercial decisions:
- Loan-to-value (LTV) — the loan as a percentage of the property's value. Commercial LTVs are generally more conservative than residential.
- Debt service coverage ratio (DSCR) — whether the property's income covers its debt payment, with a cushion.
- Debt yield — the property's income relative to the loan amount, a measure lenders use to size a loan independent of rate.
You can estimate several of these with our commercial calculators before approaching a lender.
Property types and typical terms
Commercial covers a wide range — multifamily (5+ units), office, retail, industrial, mixed-use, and special-purpose properties. Terms vary by type and by how stable the property's income is. A fully leased, well-located building is easier to finance than a vacant or transitional one, which may call for bridge or private capital instead.
Balloon payments and amortization
Many commercial loans amortize payments as if the loan lasts, say, 25 years, but the loan itself comes due much sooner — leaving a balloon balance that must be refinanced or paid off. Understanding this structure up front is essential so you plan your exit or refinance ahead of the balloon.
When to use a broker vs. a bank
A single bank offers its own commercial products and rules. A broker who works multiple sources can shop your deal across banks, credit unions, and private lenders — useful when the property or borrower doesn't fit one lender's box. For straightforward, strong deals a bank may be fine; for anything unusual, breadth of options matters.
Your situation is what matters
Commercial financing has more moving parts than a home loan. Whether it's your first commercial property or your tenth, let's look at the structure and find the right source for the deal.