Why It Matters
You cross into commercial lending the moment a property has five or more units or the collateral is non-residential. Approval hinges on whether the building's net operating income covers the debt service by at least 1.20x — not your W-2. Terms are shorter than residential loans: a 5-, 7-, or 10-year balloon with 20–30-year amortization. The five main loan types — conventional, SBA, CMBS, bridge, and life company — carry meaningfully different risk profiles. Knowing which one fits your property and exit timeline before you accept a term sheet is the difference between a clean close and an expensive restructure.
At a Glance
- Primary underwriting metric: DSCR — NOI ÷ annual debt service; minimum 1.20x–1.25x
- Typical LTV: 65–75% stabilized; 60–65% bridge or value-add
- Term vs. amortization: 5–10 year term with 20–30-year amortization; balloon due at term end
- Rate range (2024–2025): 6.5–8.5% depending on loan type and term
- Personal guarantee: Required on conventional; non-recourse available on CMBS and life company loans
- Closing timeline: 45–90 days conventional; 30–45 days bridge
How It Works
The asset, not the borrower, qualifies the loan. Commercial lenders underwrite on the property's net operating income — cash generated after operating expenses, before debt service. If the NOI covers the mortgage payment by 1.20x–1.25x, the deal qualifies. Your personal income matters, but it's secondary. This removes the personal DTI ceiling that limits residential loan capacity and makes large portfolios possible.
Shorter terms, balloon at the end. Payments are calculated on a 20–30-year amortization schedule, but the full remaining balance comes due as a balloon payment at year 5, 7, or 10. You sell or refinance at that point. Model the balloon exit before you sign — not after.
Five loan types, five different risk profiles. Conventional bank loans are the most flexible: negotiable terms, recourse loan personal guarantees, rates 0.25–0.75% above agency. SBA loans suit owner-occupied properties with lower down payments. CMBS loans are securitized and rate-competitive but rigid — prepayment penalties are defeasance or yield maintenance and cannot be modified post-securitization. Bridge loans serve transitional assets not yet stabilized enough for permanent financing. Life company loans offer the best rates in commercial real estate, reserved for Class A stabilized assets.
Cap rate connects NOI to value. Lenders use the income approach: NOI ÷ market cap rate = property value. A building generating $118,800 NOI in a 6.5% cap rate market values at roughly $1,827,000. Overstating income inflates the appraisal — underwriters reconcile your numbers against comparables.
Real-World Example
Diane owns a 12-unit apartment building generating $118,800 annual NOI. She applies for a $900,000 loan at 7.0%, 25-year amortization, 5-year balloon. Monthly payment: $6,361. Annual debt service: $76,332. DSCR: $118,800 ÷ $76,332 = 1.56x — above the 1.25x minimum. The lender appraises the property at $1,350,000. LTV: $900,000 ÷ $1,350,000 = 66.7% — within 70%. Loan approved. She uses the proceeds to buy out a co-owner's equity.
At year 5, the balloon comes due. NOI has grown to $133,200. Property value: $1,520,000. She refinances at 65% LTV: $1,520,000 × 0.65 = $988,000. After 5 years of amortization, the remaining balance is approximately $820,000. The new loan retires the balance and returns $168,000 — minus origination fees and closing costs — which she deploys into her next acquisition.
Pros & Cons
- Enables acquisition of 5+ unit and non-residential assets that residential financing cannot reach
- Property-income underwriting removes the personal DTI ceiling that caps residential portfolio growth
- Non-recourse structures on CMBS and life company loans limit personal exposure to the collateral
- Balloon-plus-refinance cycle allows equity extraction every 5–10 years as NOI and values grow
- 5–10 year balloon creates refinance risk at a date outside your control
- 25–40% down payment requirements tie up more capital than residential financing
- Conventional commercial underwriting takes 45–90 days — roughly 2–3x longer than residential
- Personal guarantees on conventional and portfolio loan debt scale personal liability with portfolio size
Watch Out
Balloon timing is a structural risk. Many investors model smooth refinances at year 5, but the refi only works if NOI has grown and the property still meets DSCR at the new rate. Stress-test your exit at rates 200 basis points higher than today. The balloon is due on schedule regardless.
DSCR reflects today, not your upside. Lenders underwrite on current leases and trailing-12-month expenses. Buying a value-add investment with below-market rents? The current NOI may not support permanent financing. Bridge debt solves this — at 8–11% with a deadline to stabilize before transitioning.
CMBS prepayment penalties are locked in. Unlike step-down structures on bank loans, CMBS defeasance and yield maintenance penalties are non-negotiable once securitized. If your plan depends on selling or refinancing before the balloon, price the full prepayment cost into your underwriting before signing.
Ask an Investor
The Takeaway
Commercial loans unlock a tier of real estate — 5+ unit multifamily and non-residential assets — that residential financing cannot reach. The trade-off: shorter terms, balloon payments, income-based underwriting, and five loan types with different risk profiles. Master the DSCR math, match the loan type to your exit timeline, and model the balloon before signing. The investors who run into trouble on commercial debt almost always own the deal fine — they just didn't plan the exit.