Structure and Requirements for Commercial Mortgages

David Cohn
Jul 22, 2021

If this is your first time applying for a commercial mortgage loan, it’s easy to get overwhelmed by the unique jargon specific to this type of financing. Commercial loans are very different from residential mortgages, even though they share some characteristics.

This blog is a short primer to help you understand how commercial loan mortgages are structured and what factors affect them.

Residential vs. commercial mortgage structure

Home loans and commercial loan mortgages are alike because they both involve set terms negotiated between you (the borrower) and the lender. But the similarities end there.

One significant distinction is the ‘term’ of these loans. Commercial mortgages are relatively short, ranging only from five to 20 years. In contrast, it’s common for residential mortgages to have 30-year terms. Another distinction is the ‘amortization period.’

Commercial mortgage loan amortization periods extend more extended than the actual life of the loan. This is why it’s essential to look at the ‘amortization rate,’ which represents how much time it will take to pay the loan off at a specific interest rate.

For example, your commercial mortgage may be structured to have a seven-year term but have a 30-year amortization rate. So even though the loan term is only seven years, your monthly payments will be based on paying the loan off after 30 years.

This results in a ‘balloon payment’ by the end of the term to cover the remainder of the loan.

This balloon payment can either be fully paid off or refinanced before the end of the mortgage loan term.

Commercial mortgage down payment requirements

If you are thinking of applying for a commercial mortgage loan, one of your primary concerns is probably the down payment. How much do you need? The answer depends on many factors.

In general, commercial mortgage down payment terms require a deposit that amounts to 20% to 40% of the property’s total value. Traditional lenders often ask for at least a 25% down payment, while some private lenders can occasionally lower the requirement to 10% (though this is very rare).

A commercial loan down payment shows the lender that you (as the borrower) are willing to take some of the risks yourself. It also demonstrates that you’re serious about making a profit from the investment, making the lender confident about your ability to repay the loan.

Down payment requirements can be affected by several factors, such as your personal and business credit situation. It is also affected by the type of property in question, current market trends, terms of the loan, and the lender itself.You have some degree of control over how much to put down.

You can certainly pay more than the minimum down payment if you have cash on hand and want to lower the total amount of interest accrued over the loan term.

It’s essential to make determinations about the optimum down payment size based on your unique circumstances. It may be a good idea to consult a highly experienced commercial real estate financing expert about this matter.

After all, a down payment is a huge commitment, so you want to be sure that you have all the information it takes to make an informed decision. You may be wondering: How is the deposit requirement determined?

Commercial Investment property loans are built around a loan-to-value or LTV percentage. The LTV shows how much of the building’s value the lender is willing to lend. Many factors determine it, but it is primarily based on the lender’s risk appetite. If a lender’s maximum LTV is 80%, for example, it means you have to make a 20% down payment.

Commercial mortgage rates explained.

It’s a good idea to stay informed about the current commercial real estate rates if you are interested in applying for a commercial real estate loans.

You need to understand how the current rates can affect your mortgage, the terms of the loan, and other characteristics of the loan itself.

Keeping tabs on current rates will also make you more equipped to assess whether a lender’s offer aligns with market trends. It will likewise allow you to determine if it’s an excellent time to seek a loan based on market conditions.

The broad range of commercial mortgage loan rates is around 4% to 11%. Here are some of the factors that can affect your rate:

  • Loan type – Some loan types are cheaper than others because they are less risky for the lender.
  • Your business and personal credit score – The higher your scores are, the lower your rate will likely be.
  • Loan details – Bigger and longer loans generally have higher rates. This is how lenders protect themselves.
  • Current market conditions – The economy and the commercial real estate market can fluctuate. This is why it’s crucial to take advantage of opportunities when conditions are favorable for your business.

How to find a commercial mortgage lender

Thanks to the internet, it’s easier than ever to find reputable lenders and get offers from them.

But beware. It has also become more accessible for organizations to look more legitimate online than they are.

There are so many different sources offering commercial mortgage advice nowadays, each of them claiming to be experts. If you don’t proceed with caution, it’s easy to go down the wrong path.

It’s usually best to work directly with commercial property loan specialists with decades of experience and expertise in commercial lending.

Though there’s nothing wrong with working with a do-it-all lender, you’ll likely find more focused attention from a company that deals exclusively in commercial property loans.

These types of lenders have a more in-depth understanding of commercial real estate investing. In addition, they understand where you want to go and help you get there because they are working in the industry.

A suitable commercial mortgage lender can guide you throughout the entirety of the loan process, from the moment you express initial interest until closing—and sometimes even beyond.

They are always happy to provide you the information you need and clearly explain the process and loan terms to ensure that you understand what you’re getting into.

The best lenders use a client-centered approach. They take time to understand your unique goals and offer the best financing solution. They have a proven track record of successful deals and a long list of happy clients.

Ultimately, these types of lenders are ‘partners.’ Their goal is to create a win-win scenario. They want you to succeed and provide a clear direction and actionable advice to help your project.