What is a Commercial Mortgage?
A commercial mortgage is a loan secured by commercial or investment property rather than a primary residence. In real estate investing, commercial mortgages are used to finance properties with five or more residential units, office buildings, retail spaces, industrial properties, and mixed-use buildings. They operate under fundamentally different rules than the residential mortgages most people are familiar with.
The distinction matters for investors because once you move beyond four residential units, you leave the world of conventional residential lending entirely. Fannie Mae and Freddie Mac don't back commercial loans. Instead, you're dealing with portfolio lenders, commercial banks, credit unions, CMBS (commercial mortgage-backed securities) lenders, and life insurance companies. Each has different criteria, terms, and appetites for risk.
How commercial mortgages differ from residential
Residential mortgages evaluate the borrower's personal income, credit score, and debt-to-income ratio. The property matters, but the borrower's ability to pay is the primary consideration. Commercial mortgages flip this emphasis. The property's income and value are the primary underwriting criteria. The borrower's financials still matter, but the property must demonstrate the ability to service the debt on its own.
This is why commercial lenders focus heavily on net operating income (NOI) and the debt service coverage ratio (DSCR). A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage payment. Most commercial lenders require a minimum DSCR of 1.20 to 1.35, depending on property type and risk profile.
Typical commercial mortgage terms
| Feature | Residential | Commercial |
|---|---|---|
| Amortization | 30 years | 20-30 years |
| Loan term | 30 years (fixed) | 5-10 years (balloon) |
| Down payment | 3-20% | 20-35% |
| Interest rate | Based on credit | Based on property + credit |
| Prepayment penalty | Rare | Common (yield maintenance, defeasance) |
| Personal guarantee | Always | Sometimes (recourse vs non-recourse) |
The balloon structure is the most important difference for investors to understand. A commercial loan might amortize over 25 years but come due in 7 years. At that point, you either refinance, pay off the balance, or sell the property. This creates refinance risk that doesn't exist with a standard 30-year residential mortgage.
Types of commercial lenders
Local and regional banks are often the best starting point for investors buying their first commercial property. They hold loans in their own portfolio, which gives them flexibility on terms. They want to see a relationship — your deposits, your business accounts, your track record in the market.
CMBS lenders originate loans that get packaged into securities and sold to investors. These loans are standardized with less flexibility but often offer competitive rates. They work best for stabilized properties with strong occupancy and predictable income.
Credit unions can be surprisingly competitive for smaller commercial deals, particularly multifamily properties under $2 million. Their rates and fees are often lower than banks, though their loan limits may be smaller.
Life insurance companies lend on the lowest-risk commercial properties: well-located, stabilized, institutional-quality assets. If you have a Class A multifamily or a credit-tenant retail property, insurance company debt offers some of the best terms available.
When investors use commercial mortgages
The most common scenario is buying a multifamily property with five or more units. A 10-unit apartment building cannot be financed with a conventional residential loan regardless of the borrower's qualifications. The property type dictates the loan type.
Investors also use commercial mortgages when they've hit the conventional loan limit. Most investors can hold a maximum of 10 conventional residential mortgages. Once you reach that cap, commercial lending becomes the path forward for continued growth, even for smaller properties that technically qualify for residential financing.
The BRRRR strategy often transitions into commercial territory as investors scale. Your first few rentals might use conventional 30-year mortgages, but properties 11 through 50 will likely be commercial loans, portfolio loans, or held in LLCs with commercial financing.
Qualification requirements
Commercial lenders evaluate both the property and the borrower. On the property side, they want to see current rent rolls, historical operating statements (typically two to three years), a recent appraisal, and environmental reports for certain property types. On the borrower side, they review personal financial statements, tax returns, credit history, and real estate experience.
Experience matters more in commercial lending than residential. A lender making a $2 million loan on an apartment building wants to know that the borrower has successfully managed rental property before. First-time commercial borrowers can overcome this by partnering with an experienced operator or by starting with smaller commercial properties where the risk is lower.