How to Finance Commercial Real Estate: Loan Types, Requirements, and Strategies for 2026

Financing commercial real estate works nothing like getting a home mortgage. The underwriting is different, the terms are different, the down payments are bigger, and the loan structures can get complicated fast.

Whether you're buying your first strip mall or refinancing a warehouse portfolio, this guide breaks down every major financing option, what lenders actually look for, and how to structure deals that get approved.

How [Commercial Real Estate Loans](/blog/dscr-loan-commercial-property) Differ from Residential

Before diving into loan types, here's what makes commercial financing fundamentally different:

The property's income matters more than yours. Residential lenders care about your W-2 and credit score. Commercial lenders care most about the property's [net operating income](/blog/net-operating-income-guide) (NOI) and whether it can cover the debt payments. Your personal finances still matter, but they're secondary.

Shorter loan terms with longer amortizations. A typical commercial loan has a 5, 7, or 10-year term with a 25-year [amortization schedule](/blog/amortization-schedule-guide). You make payments as if it's a 25-year loan, but the remaining balance comes due at the end of the term. That means you'll need to refinance or sell before the balloon payment hits.

Higher down payments. Expect to put down 20% to 35% of the purchase price. Some loan programs go as low as 10% (SBA), but 25% is the most common requirement.

Recourse vs. non-recourse. Many commercial loans are recourse, meaning the lender can come after your personal assets if you default. Larger loans ($3M+) sometimes offer non-recourse terms where the property is the only collateral.

Key Metrics Lenders Evaluate

[Debt Service Coverage Ratio](/blog/best-dscr-lenders-2026) (DSCR)

This is the most important number in commercial lending. DSCR = Net Operating Income ÷ Annual Debt Service.

• 1.25x DSCR — Most lenders' minimum. Means the property generates 25% more income than needed to cover loan payments.
• 1.30x–1.50x — Preferred range. Gives the lender a comfortable cushion.
• Below 1.0x — The property can't cover its debt. No conventional lender will touch this.

Example: A property with $200,000 NOI and $150,000 in annual debt payments has a 1.33x DSCR. That's solid.

Loan-to-Value Ratio (LTV)

How much you're borrowing relative to the property's appraised value.

• 65%–75% LTV — Standard for most commercial loans.
• 80%–90% LTV — Possible with SBA loans or strong sponsorship.
• 50%–60% LTV — Common for CMBS and higher-risk property types.

Debt Yield

Debt yield = NOI ÷ Loan Amount. Lenders use this as a quick risk check independent of interest rates. Most want to see at least 8%–10% debt yield.

Borrower Net Worth and Liquidity

Lenders typically want to see:

• Net worth equal to or greater than the loan amount.
• Post-closing liquidity of 6–12 months of debt service payments.
• Commercial real estate experience — First-time buyers face more scrutiny.

Types of Commercial Real Estate Loans

1. Conventional Bank Loans

Best for: Stabilized properties with strong cash flow. Borrowers with banking relationships.

The bread and butter of commercial [real estate financing](/blog/balloon-mortgage-explained). Local and regional banks are the biggest source of commercial property loans under $5 million.

Typical terms:

• LTV: 65%–75%
• Interest rates: 6.5%–8.5% (2026 market)
• Term: 5–10 years
• Amortization: 20–25 years
• Recourse: Usually full recourse
• Closing timeline: 45–90 days

Advantages:

• Flexible underwriting — bankers can make judgment calls
• Relationship-based — good customers get better terms
• Can often negotiate prepayment penalties

Disadvantages:

• Full recourse liability
• Balloon payment risk at term end
• Slower than some alternatives

Pro tip: Build a relationship with a local community bank before you need a loan. Deposit your business accounts there, introduce yourself to the commercial lending team, and discuss your investment plans. When you bring a deal, they'll already know you.

2. SBA 504 Loans

Best for: Owner-occupied commercial properties. Small business owners buying their own space.

The SBA 504 program is one of the best financing tools in commercial real estate, but it's specifically for owner-occupied properties — you must occupy at least 51% of the building.

How it works:

• A conventional lender provides 50% of the project cost (first mortgage)
• A Certified Development Company (CDC) provides 40% ([second mortgage](/blog/best-heloc-lenders-2026), backed by SBA)
• You put down 10%

Typical terms:

• LTV: Up to 90%
• Interest rates: Below market (the CDC portion is tied to Treasury rates)
• Term: 10 or 25 years on the CDC portion (fully amortizing — no balloon)
• Closing timeline: 60–120 days

Advantages:

• Only 10% down payment
• Below-market fixed rates on the CDC portion
• 25-year fully amortizing option — no balloon payment
• Can include soft costs, furniture, and equipment

Disadvantages:

• Must be owner-occupied (51%+)
• Cannot be used for investment-only properties
• Slower closing process
• SBA guarantee fee adds to closing costs (typically 1.0%–1.7% of the CDC portion)

3. SBA 7(a) Loans

Best for: Smaller commercial purchases under $5 million. Businesses that don't qualify for 504.

The SBA 7(a) is more flexible than the 504 but comes with higher rates and fees. Maximum loan amount is $5 million.

Typical terms:

• LTV: Up to 85%–90%
• Interest rates: Prime + 1.5% to 2.75% (variable)
• Term: Up to 25 years for real estate
• Closing timeline: 30–90 days

Advantages:

• Flexible use of funds
• Lower down payment than conventional
• Available for startups with limited history

Disadvantages:

• Variable interest rates (can increase significantly)
• SBA guarantee fees
• Personal guarantee required
• More paperwork than conventional loans

4. CMBS Loans ([Commercial Mortgage](/blog/commercial-mortgage-guide)-Backed Securities)

Best for: Larger properties ($2M+). Investors who want non-recourse financing.

CMBS loans are originated by lenders, then pooled and sold to investors as bonds. Because the loan is securitized, the terms are rigid — there's no calling your banker to negotiate a late payment.

Typical terms:

• LTV: 65%–75%
• Interest rates: 6.0%–8.0%
• Term: 5, 7, or 10 years
• Amortization: 25–30 years
• Non-recourse: Yes (with standard "bad boy" carve-outs)
• Minimum loan: $2M–$3M (varies by lender)
• Closing timeline: 60–90 days

Advantages:

• Non-recourse — property is the only collateral
• Competitive rates for larger loans
• Available for a wide range of property types

Disadvantages:

• Rigid terms — no flexibility if you need a modification
• Steep prepayment penalties (defeasance or yield maintenance)
• Special servicer involvement if problems arise
• Higher closing costs

Warning about prepayment: CMBS loans typically require defeasance to prepay — you must purchase Treasury securities that replicate the remaining loan payments. This can cost hundreds of thousands of dollars on larger loans. Don't take a CMBS loan if you plan to sell or refinance before the term ends.

5. Bridge Loans

Best for: Value-add properties. Transitional deals. Quick closings.

Bridge loans are short-term financing (6 months to 3 years) designed to "bridge" you from acquisition to stabilization, at which point you refinance into permanent financing.

Typical terms:

• LTV: 65%–80% of as-is value (or up to 80%–85% of total project cost)
• Interest rates: 8%–12%
• Term: 12–36 months
• Interest-only payments: Common
• Closing timeline: 2–4 weeks

Advantages:

• Fast closing
• Flexible underwriting — lenders focus on the business plan
• Available for properties that don't qualify for conventional loans (vacant, under-leased, needing renovation)

Disadvantages:

• Expensive — high rates plus origination fees (1%–3%)
• Short term creates refinance pressure
• Recourse is common
• If your business plan doesn't work out, you're stuck with expensive debt

6. Life Insurance Company Loans

Best for: Institutional-quality properties. Low-leverage, long-term holds.

Life insurance companies (MetLife, Prudential, New York Life) make some of the best commercial loans available — but they're picky. They want stabilized, Class A properties in major markets.

Typical terms:

• LTV: 55%–65%
• Interest rates: 5.5%–7.0% (often the lowest available)
• Term: 7–30 years
• Non-recourse: Yes
• Minimum loan: $5M–$10M+

Advantages:

• Lowest rates in the market
• Long terms with fixed rates
• Non-recourse
• Flexible prepayment options

Disadvantages:

• Very selective — only the best properties qualify
• Low leverage means large down payments
• Slow underwriting (90–120 days)
• Minimum loan sizes exclude smaller investors

7. Private/Hard Money Loans

Best for: Deals that need to close immediately. Properties that don't qualify elsewhere. Short-term plays.

Private lenders and hard money shops focus on the property value, not the borrower's financials. If the deal makes sense, they'll fund it.

Typical terms:

• LTV: 60%–70%
• Interest rates: 10%–15%
• Term: 6–24 months
• Origination fees: 2%–5%
• Closing timeline: 1–2 weeks

Use hard money as a tool, not a strategy. Get in, execute your plan, get out.

8. Seller Financing

Best for: Off-market deals. Sellers doing 1031 exchanges. Properties that are hard to finance conventionally.

The seller acts as the lender. You make payments directly to them instead of a bank. Terms are negotiable.

Common structures:

• 70%–80% LTV
• Interest rates: 5%–8% (often below market)
• Term: 3–10 years with balloon
• Amortization: 20–30 years

Why sellers agree to this:

• Tax benefits — installment sales spread capital gains over time
• Higher sale price — sellers often get asking price or more
• Steady income — many sellers want cash flow, not a lump sum
• 1031 exchange failures — if a seller can't find a replacement property, carrying the note avoids immediate tax

Creative Financing Strategies

Assumable Loans

Some commercial loans (especially CMBS and FHA-backed) are assumable. If the current owner has a loan at 4.5% and today's rates are 7.5%, assuming that loan saves you a fortune. You'll pay a fee (typically 1% of the loan balance) and need to qualify with the lender.

Master Lease Agreements

Instead of buying the property outright, you lease it from the owner with the right to sublease to tenants. You control the property and its income without needing purchase financing. If the property performs, you exercise an option to buy at a predetermined price.

Syndication

Pool money from multiple investors to make larger purchases. You (the sponsor/general partner) bring the deal and management expertise. Limited partners contribute capital. Typical splits: 70/30 or 80/20 in favor of limited partners, with the sponsor earning fees plus a promoted interest above a preferred return hurdle.

Mezzanine Debt

When your first mortgage doesn't cover enough of the purchase price, mezzanine debt fills the gap between your senior loan and your equity. Rates are high (10%–15%), but it reduces the cash you need to close.

Step-by-Step: Getting a Commercial Loan

1. Prepare your financials. Personal financial statement, tax returns (3 years), bank statements, schedule of real estate owned, resume of real estate experience.

2. Build the property package. Rent roll, operating statements (3 years), lease copies, property condition report, photos, market comps.

3. Calculate your numbers. NOI, proposed debt service, DSCR, LTV, debt yield. Know these cold before approaching lenders.

4. Shop multiple lenders. Get quotes from at least 3–5 lenders. Include local banks, credit unions, CMBS lenders, and mortgage brokers.

5. Compare term sheets. Look beyond the interest rate. Compare prepayment penalties, recourse requirements, reserve requirements, and closing costs.

6. Lock your rate and close. Once you select a lender, move quickly through underwriting. Respond to document requests within 24 hours.

FAQs

What credit score do I need for a commercial real estate loan?

Most conventional lenders want 680+. SBA loans typically require 650+. Some bridge and hard money lenders don't have minimums — they focus on the deal, not your score. That said, better credit always gets better terms.

Can I get a commercial loan with no money down?

Technically possible but rare. Strategies include seller financing for the down payment (some lenders allow this, many don't), combining an SBA loan with a seller second, or bringing in equity partners. Realistically, expect to bring 10%–35% of the purchase price.

How long does it take to close a commercial real estate loan?

• Hard money/bridge: 1–3 weeks
• Conventional bank: 45–90 days
• SBA: 60–120 days
• CMBS: 60–90 days
• Life company: 90–120 days

What are the typical closing costs for a commercial loan?

Expect 2%–5% of the loan amount in total closing costs, including:

• Appraisal: $3,000–$10,000
• Environmental (Phase I): $2,000–$5,000
• Legal fees: $5,000–$15,000
• Title insurance: Varies by state
• Origination fee: 0.5%–2%
• Survey: $3,000–$7,000

What is a balloon payment?

It's the remaining loan balance that comes due at the end of your loan term. If you have a 10-year term with 25-year amortization, you've only paid down a fraction of the principal after 10 years. The remaining balance (the balloon) must be paid in full — typically by refinancing or selling.

Can I use a commercial loan to buy an apartment building?

Yes. Properties with 5+ units are classified as commercial real estate and require commercial financing. Buildings with 1–4 units use residential financing (Fannie Mae, Freddie Mac, FHA). The 5-unit line is an important threshold for investors to understand.

[Should I use a mortgage broker](/blog/mortgage-broker-vs-direct-lender) or go directly to a lender?

For your first deal, a good commercial mortgage broker is worth the fee (typically 0.5%–1% of the loan amount). They know which lenders are active for your property type, can shop multiple sources simultaneously, and guide you through the process. As you gain experience and build lender relationships, you can go direct.

Bottom Line

Commercial real estate financing has more options than most investors realize. The right choice depends on your property type, investment timeline, risk tolerance, and how much capital you're bringing to the table.

For most investors, the path is: start with conventional bank loans or SBA for smaller deals, build a track record, then access CMBS and life company money as your portfolio grows. Use bridge loans and creative strategies when the deal requires it — not as a default.

The single best thing you can do is build relationships with lenders before you need them. Walk into a bank with a deal and a relationship, and you'll close faster, on better terms, every time.

Related Articles

• 1031 Exchange for Beginners: Complete Guide to Deferring Capital Gains Taxes
• 1031 Exchange: Defer Taxes, Build Wealth Faster
• 1031 Exchange Rules 2026: Complete Guide to Tax-Deferred Real Estate Exchanges