Commercial Mortgage Loan FAQs

David Cohn
Feb 12, 2023
Space Planning

Commercial real estate or CRE investing is a niche industry with its unique challenges, especially when it comes to financing. Not all investors become successful in making money on commercial properties, but those who do can make a tidy profit and build a stable and reliable income source for the long haul.

If you’re interested in venturing into this type of real estate investing, it’s crucial to work with an excellent commercial real estate broker. You also need to understand the basics of commercial real estate mortgages.

In this blog, we will talk about the most commonly asked questions regarding commercial mortgages. You will learn how CRE property loans are different from residential property loans.

You’ll also learn about the different types of commercial mortgage products available and develop a good grasp of how commercial real estate lending works.

What is Commercial Mortgage Loan?

Commercial mortgages are property loans that are uniquely delegated to purchasers of real estate assets considered “commercial.” Unlike residential property loans that are granted to individuals, commercial mortgages are made out to businesses. This is why, if you want to be a commercial real estate investor, you have to form an s-corporation or a limited liability company.

What properties are considered commercial?

Real estate assets are classed as commercial if used solely for business purposes and produce an income. Some of the most common commercial real estate examples include retail spaces and office spaces in which a business operates.

What can you use the money for?

Aside from financing the property itself, you can also use proceeds from a commercial property loan to fund any construction or renovation project as needed. You may also leverage CRE financing to help keep the property fully operational and well-maintained so that it can be leased fully.

What are the Different CRE Financing Options Available?

There is a wide variety of commercial property financing options in the market. However, as an investor, you must be prepared to guarantee your commercial mortgage via collateral (lien). Failing to meet the repayment terms of the loan can mean that the creditor can seize the asset.

If you are confident about your project, there is no need to worry. Here are some of the most common commercial property financing options in the market today. They are offered by different kinds of lenders—from traditional banks to private individuals and pension funds, insurance companies, and the government.

SBA 7A Loan

The Small Business Administration or SBA has some of the most affordable commercial financing options available and guarantees a part of the loan.

The loans backed by the SBA reduce the lender’s risk while increasing the borrower’s credibility. The 7A loan, in particular, is widely used for smaller projects and is one of the easiest programs to qualify for.

Note that the interest rate on 7A loans is slightly higher than that of SBA 504 loans. Still, it remains the most popular option in the market.

SBA 504 Loan

This is another type of loan that is backed by the SBA. While the 7A loan described above works best for smaller commercial property projects, the 504 loan is designed for larger investments—particularly those go over $1 million. Investors are required to pay 10% of the total amount as a down payment.

An SBA certified development company takes care of 40% of the loan, while the bank lends the remaining 50%.

Conventional Bank Loan

Traditional banks make most commercial property loans. These lenders generally prefer to lend to investors with long and strong credit histories.

If you have a credit score of 660 and up, and if you invest in a made to a large-sized project, then a conventional bank loan may be the most viable financing option for you. These loans typically offer competitive interest rates.

They also don’t require the owner to occupy the property. However, most banks require a down payment of 20%. They will also charge penalties if you pay the loan offer earlier than agreed.

Hard Money Loans

Hard money loans are used as commercial real estate financing tools by seasoned investors. They offer quick solutions for those who need to act on a deal fast before competitors can steal it from under them. Hard money loans are generally short-term loans with high-interest rates.

Hard money lenders evaluate the application based on the property’s value instead of the borrower’s credit history. CRE investors often use hard money loans as “bridge money” while waiting for the approval of a longer-term traditional bank loan. This is why hard money loans are also called “bridge loans” in the commercial real estate industry.

Online Marketplace Loans

Also called “soft money loans,” these loans can be obtained from online marketplaces that are organized to match CRE borrowers with private CRE investors.

It’s referred to as “soft” money because the interest rates are lower than hard money loans, though they are still higher than what you might get from conventional bank loans. Terms are shorter, too, ranging anywhere from 6 months to just a few years.

Joint Venture Loans

Suppose there are some cases when an investor may fail to obtain financing by themselves, or cases when it might not be ideal for bearing risk solely.

For deals like this, the best option may be to pursue a joint venture. Two or more parties can apply for a joint venture loan. They will share the risks equally, as well as the returns.

Also Read: Commercial Real Estate Loan Terminologies

What do Lenders should know while lending Commercial Mortgage Loan?

Creditworthiness remains an important factor in commercial real estate loans. However, lenders also look at a property’s overall value and potential income production in deciding whether to approve an application or not. Commercial property loans are generally associated with higher risks compared to residential mortgages.

That said, potential revenue that can be made off of the property incentivizes lenders. A good commercial mortgage broker can help you find the right financing solution for your project. Should you have specific requirements, your broker can also custom design a solution that suits your unique needs.

Is it possible to get a commercial mortgage with no money down?

It can be tricky, but it’s possible. Some CRE Investors do this by leveraging various financing strategies, including finding an investing partner, utilizing a purchase money mortgage, or using hard money.

So don’t shy away from CRE investing just because of the perceived difficulty of finding money for a down payment. There are many things you can do to access this asset class.

First, you can try to bring in an investing partner if you cannot raise the down payment yourself. Find a partner who can provide the remainder of the money you need to qualify for a traditional bank loan.

Of course, you need a project that promises returns that are attractive enough to be considered worthwhile by another investor.

Using hard money is another viable option. A bridge loan can quickly give you the funding you need to seal a deal fast while you’re negotiating with a traditional lender who can provide you a longer-term solution.

Hard money interest rates tend to be high, though, so be sure that you have a solid business plan that will allow you to repay the loan as agreed.

Exploring purchase money mortgages is another way to buy CRE assets without a down payment. This arrangement is better known as “seller-financed” deals and is exactly what its name suggests. The seller loans money to the borrower so that the borrower can purchase the asset. Rates and terms can be negotiated.

This arrangement has the potential to be beneficial to both parties. However, purchase money mortgage borrowers have to be ready to risk the possibility of repossession by sellers should they fail to make payments as agreed.

How much do you have to pay in interest rates on commercial mortgages?

Commercial real estate loan interest rates vary significantly depending on the loan type you choose to elect. SBA backed loans have some of the lowest.

The SBA 7A loan, for instance, has interest rates between 5.5% and 6.75%. Even lower are 504 loan interest rates, which range from 3.5% to 6%.

Conventional bank loans typically charge between 5% to 7% in interest, fixed or variable. The highest interest rates can be expected from hard money loans; after all, hard money lenders are also taking on bigger risks.

Expect anywhere from 10% to 18%, though you may get better rates by working with a commercial mortgage broker specializing in hard money financing. These professionals have a network of private lenders who may be able to offer better deals.

Note that hard money loans can also be fixed or variable. They have the shortest terms.

What are commercial mortgage loan terms?

CRE property loan terms vary widely, too, depending on the loan type. They can range from a few months (as in hard money financing) to 20 years. The amortization period may run longer than the actual loan term.

Balloon payments are required when the borrower chooses to make small payments throughout the term’s duration and a large (balloon) final payment in the end to settle any outstanding amount on the loan’s principal.

This may sound complicated, but luckily, a commercial mortgage broker can help you understand everything. There are also online commercial property loan calculators that you can use to simply explore the market.

If you own a business, does it make sense to buy your commercial real estate for your business use?

Entrepreneurs who are serious about growing their companies and giving it a solid home often turn to commercial mortgages to buy their land, building, or factory.

In this case, a commercial mortgage will give you the money you need not just to house your business operations but also to augment your business funding.

Having your business premises likewise reduces your exposure to increasing rental charges. Taking out a commercial mortgage is a good way to future-proof your company, too.

The property’s value should increase over time. This means that you can build equity and access it as necessary—such as when you need to release some capital for growth or investment, consolidate business debts, expand trading, or buy some new equipment.

What’s more, commercial mortgage payments are often cheaper than commercial rent. You also have the option to lease or sublet parts of your property for ancillary income.

Do you need a commercial mortgage broker?

It’s best to work with a commercial mortgage broker if you want to find the most equitable financing solution for your project.

Commercial property lending is a highly specialized niche, after all. You need the guidance of an expert to navigate it.

Many commercial mortgage brokers want your business, so how do you choose one? It’s important to find the right fit—someone who is not just competent but also good at truly listening to your concerns and addressing them. Here are some questions to ask a potential broker:

  • What areas or cities do your practice focus on? A good commercial mortgage broker will have first-hand knowledge of, and years of experience in the locations you are interested in.
  • Where do you think the CRE market is headed right now? You want to work with a broker who is realistic and honest. A good broker will have your best interests in mind and advise you on the best steps to take given the current market situation.
  • How long have you been a commercial mortgage broker? Ask about their experience; industries served, business/office sizes, past clients, etc. Ask how many deals they have completed. Work with someone who is consistently active in the CRE market.
  • What are some of your biggest success stories? Ask what hurdles they’ve helped their previous clients overcome. Real expertise reveals itself in the face of adversity.
  • Have you ever worked with an investor like me/company like mine before? No two investors or companies are indeed alike. Your specific needs won’t be like any other’s. However, it’s important to work with a commercial mortgage broker who can draw on their previous experience in a similar situation. They can provide insights that can’t be matched by brokers who have no prior experience in your industry.

With these commercial mortgage basics in mind, you, as an investor, can now feel better informed on how to best approach your first deal.

Commercial real estate is a highly specialized and unique niche that is very different from residential real estate, so it’s important to thoroughly educate yourself before making any decisions. The risks are bigger—but so are the rewards if you play your cards right.

The key to succeeding in this sector is to work with a good commercial real estate broker who has your best interests in mind.

You can’t go wrong with Capital Investor. We specialize in customizing financing solutions for different kinds of commercial real estate projects of all sizes.

Talk to us today to tell us about what you’re doing. Whether you’re interested in bridge loans, hard money, stated income loans, construction loans, jumbo loans, or permanent loans, we’ve got you covered.

Our team will be with you throughout your CRE investment journey. We will take time to truly understand the circumstances and your requirements to structure a financing solution that best suits your project. And we don’t stop there.

After you get the funding, our team will continue to follow up on your project’s progress and offer further assistance as needed.

Space Planning
Feb 12, 2023

How to Evaluate Multifamily Properties for the Best ROI

David Cohn
Space Planning
Feb 12, 2023

How to Evaluate Multifamily Properties for the Best ROI

David Cohn
Space Planning
Feb 12, 2023

How to Evaluate Multifamily Properties for the Best ROI

David Cohn
Top Categories

Bridge Loans


Investment Trends


Commercial Loans


Hard Money Loans


Stated Income Loans


Multifamily Loans

Other FAQs