A commercial real estate loan looks similar to a home mortgage on the surface — a lender advances money secured by a property, the borrower pays it back over time. Underneath, almost everything is different. The underwriting logic, the loan structures, the players who lend the money, and the terms they offer all follow a different set of rules than residential lending, and sponsors who assume otherwise tend to get surprised at term sheet stage.
This guide covers the fundamentals: how CRE loans are underwritten, the common loan structures you'll encounter, typical terms and rates across the market, and who actually originates this capital. If you're preparing to finance an acquisition or refinance, this is the foundation everything else builds on.
How is a commercial real estate loan different from a residential mortgage?
A commercial real estate loan is underwritten primarily against the income the property generates, while a residential mortgage is underwritten against the borrower's personal income and credit — meaning a CRE loan's size and terms depend on rent roll, occupancy, and net operating income (NOI) rather than a W-2 and a credit score. This asset-based approach is why two borrowers with identical personal finances can get very different CRE loan terms on two different properties.
The core metrics lenders use to underwrite a CRE deal are also unique to the asset class:
- DSCR (debt service coverage ratio) — net operating income divided by annual debt service, measuring whether the property's cash flow covers the loan payment.
- LTV (loan-to-value) — loan amount divided by appraised property value.
- LTC (loan-to-cost) — loan amount divided by total project cost, more common on acquisition-plus-renovation or ground-up deals.
- Debt yield — NOI divided by loan amount, a leverage-independent risk measure lenders increasingly rely on alongside DSCR and LTV.
- Cap rate — NOI divided by purchase price or value, used to sanity-check valuation and pricing.
Residential loans also typically fully amortize over 15-30 years at a fixed rate. CRE loans frequently don't.
What loan structures are used in commercial real estate?
Commercial real estate loans are structured around three core mechanics — amortization, interest-only periods, and balloon payments — often combined within a single loan rather than used in isolation. A CRE loan might carry a 25-year amortization schedule for payment-sizing purposes but come due, in full, after just 5, 7, or 10 years.
- Fully amortizing: Principal and interest pay the loan off completely over its stated term (common on SBA and some smaller bank loans). Payments are level, and the balance reaches zero at maturity.
- Interest-only (IO): The borrower pays only interest for a defined period — sometimes the entire term on bridge debt — lowering the payment and boosting cash-on-cash return, but not reducing the balance.
- Balloon structure: Payments are calculated on a longer amortization schedule (often 25-30 years) than the loan's actual term (often 5-10 years), so a lump-sum "balloon" payment is due at maturity. This is standard for bank, agency, and CMBS permanent loans — the borrower must refinance or sell before the balloon date.
Worked example: A $4M loan at 6.75% on a 25-year amortization schedule carries a monthly payment of roughly $27,700. Over a 10-year term, the borrower will have paid down the balance to approximately $3.15M — leaving an $3.15M balloon payment due at year 10, financed through a refinance or sale.
| Structure | Principal paydown | Payment size | Common uses |
|---|---|---|---|
| Fully amortizing | Reaches $0 at maturity | Higher (P+I from day one) | SBA loans, smaller bank loans |
| Interest-only | None during IO period | Lowest | Bridge loans, some agency/bank permanent loans |
| Balloon (partial am.) | Partial, per amortization schedule | Moderate | Bank, agency, CMBS permanent loans |
What terms, LTV, and rates are typical for commercial real estate loans?
Typical commercial real estate loan terms run 5-10 years for permanent debt (with amortization schedules of 25-30 years), maximum leverage of 65-80% LTV depending on lender type and asset class, and rates that are quoted as a spread over an index like SOFR or the relevant Treasury yield rather than a flat number. Multifamily lending through Fannie Mae and Freddie Mac, for instance, commonly caps standard loans around 80% LTV with a minimum underwritten DSCR near 1.25x, tightening to roughly 75% LTV at some loan tiers.
| Loan Category | Typical Term | Typical LTV/LTC | Typical Rate Basis |
|---|---|---|---|
| Bank permanent loan | 5–10 yrs (25–30 yr am.) | 65–75% LTV | Prime or Treasury + spread |
| Agency (Fannie/Freddie multifamily) | 5–30 yrs | Up to ~80% LTV | Treasury + spread |
| CMBS | 5, 7, or 10 yrs (25–30 yr am.) | 65–75% LTV | Swap rate + spread |
| Bridge loan | 6–36 months | 65–80% LTV/LTC | SOFR + spread |
| SBA 504 / SBA 7(a) | Up to 25 yrs | Up to 90% LTV | Fixed or Prime + spread |
Rate and leverage move together: a lender willing to go to 80% LTV on a transitional asset is pricing in more risk than one capping out at 65% on a stabilized, Class A property. For DSCR-based investor loans specifically, our companion guide on DSCR loan requirements covers qualification thresholds in depth — this piece focuses on mechanics that apply across all CRE loan types.
Who actually lends on commercial real estate?
Commercial real estate capital comes from five main lender types — banks, government-sponsored agencies (Fannie Mae and Freddie Mac for multifamily), CMBS conduits, private debt funds, and increasingly, technology-enabled marketplaces that connect borrowers to all of the above — each with different risk appetite, speed, and pricing. Understanding which lender type fits a given deal is often more important than shopping for the lowest advertised rate.
- Banks and credit unions: Relationship-driven, moderate leverage, competitive rates for stabilized properties with strong sponsors; slower and more conservative on transitional deals.
- Agencies (Fannie Mae / Freddie Mac): Multifamily-focused, high leverage, long amortization, non-recourse — but with strict property and sponsor eligibility standards.
- CMBS conduits: Securitize pooled commercial mortgages into bonds sold to investors; offer non-recourse, fixed-rate permanent debt across asset classes, but come with less flexibility once the loan is sold and securitized.
- Private debt funds / bridge lenders: Fast, flexible, higher leverage on transitional deals — at a materially higher rate than bank or agency execution.
- Marketplaces: Platforms like YieldStack connect a single deal to multiple lender types simultaneously, letting sponsors compare bank, agency, and debt fund quotes side by side instead of approaching each one individually.
What should a sponsor understand before shopping for a CRE loan?
Before approaching lenders, a sponsor should know the property's trailing and projected NOI, calculate the DSCR and debt yield the deal supports at a target loan amount, and identify which lender type is realistically the best fit given the asset's stabilization status and the sponsor's own track record. Walking into a bank conversation with a half-vacant value-add deal — or into a bridge lender conversation expecting agency-level rates on a stabilized asset — wastes time on both sides.
Running preliminary numbers through an underwriting calculator and modeling the expected payment on an amortization schedule before a single call to a lender turns a vague financing plan into specific numbers you can defend. For a full comparison of the seven main loan types by rate, term, and best use case, see our comparison guide, and for the actual step-by-step process of closing a loan, see how to get a commercial real estate loan.
The bottom line
Commercial real estate loans are underwritten on the asset, not the individual — which means DSCR, LTV, LTC, and debt yield drive every conversation with a lender. Structures vary widely (fully amortizing, interest-only, balloon), terms are typically shorter than residential mortgages even with long amortization schedules, and the lender universe spans banks, agencies, CMBS conduits, and private debt funds, each suited to a different type of deal. Understanding these fundamentals is the prerequisite for shopping multiple lenders effectively and avoiding a mismatched term sheet.