A commercial mortgage is a loan secured by income-producing real estate rather than a home you live in. The underwriting logic is fundamentally different from residential lending: the property's ability to service the debt is what matters, and the borrower's personal income is a secondary consideration or no consideration at all.
What is a commercial mortgage?
A commercial mortgage finances property held to produce income or to support a business, rather than a primary residence. That distinction matters legally as well as commercially: because the loan is for a business purpose rather than a consumer purpose, it sits outside the consumer mortgage regulations that govern home loans.
In practice this means faster, more flexible underwriting with fewer disclosure requirements — and it also means the protections built into consumer lending do not apply. You are being treated as a commercial borrower, which is an advantage when you want speed and a responsibility when you want certainty.
The defining question is use, not property type. A single-family house held as a rental is a business-purpose asset. An office building bought to house your own company is too. What makes a mortgage commercial is that the property serves a business or investment purpose — not whether it has a lobby.
Commercial vs residential lending
| Commercial mortgage | Residential mortgage | |
|---|---|---|
| Underwritten on | The property's income and value | Your personal income and DTI |
| Documentation | Leases, rent rolls, operating statements | W-2s, pay stubs, tax returns |
| Term | Often 5–10 years with a balloon; 30-year available on some programs | 15–30 years fully amortising |
| Amortisation | Frequently longer than the term | Matches the term |
| Down payment | Typically 20–35% | As low as 3–5% on primary |
| Entity vesting | Standard and expected | Not permitted |
| Prepayment | Penalties common | None on owner-occupied |
| Consumer protections | Do not apply | Apply in full |
If the property is a 1–4 unit rental, a DSCR loan often prices better than a true commercial mortgage while using the same income-based logic. The commercial route becomes necessary at five units and above, and for non-residential property types.
Types of commercial mortgage
| Structure | What it does | Typical use |
|---|---|---|
| Permanent / term loan | Long-term financing on a stabilised asset | Buy and hold on a leased property |
| Bridge loan | Short-term financing while value or income is created | Acquisition before stabilisation, lease-up, repositioning |
| Hard money | Asset-based, fastest to close, tolerates condition | Distressed purchases, short timelines |
| Construction loan | Funds ground-up or major renovation in draws | Development and heavy value-add |
| Cash-out refinance | Releases equity from an owned asset | Recycling capital into the next acquisition |
| Acquisition loan | Purchase financing on an income property | Straightforward stabilised purchase |
Typical terms and structures
Commercial mortgage structures differ from residential ones in ways that catch first-time commercial borrowers out. Three in particular:
- Term and amortisation are not the same number. A loan may amortise over 25 or 30 years but mature in 5, 7, or 10 — leaving a balloon balance due at maturity. Your exit plan for that balloon is part of the underwrite.
- Prepayment protection is standard. Step-down penalties, yield maintenance, or defeasance all appear depending on the lender and structure. Match the protection to your intended hold period before signing.
- Recourse varies. Some commercial loans are full recourse with a personal guarantee; some are non-recourse with carve-outs for fraud and similar acts. Which one you have materially changes your risk.
The commercial mortgage rates page covers pricing drivers in detail.
How commercial underwriting works
The core question is whether the property services the debt. Lenders measure that with a debt service coverage ratio — the property's net operating income divided by its annual debt service. On residential investment property the same principle appears as rent over PITIA.
- Net operating income. Gross rental income less operating expenses, before debt service. On commercial property this includes vacancy allowance, management, maintenance, insurance, and taxes.
- Coverage requirement. Lenders set a minimum ratio the property must clear. Stronger coverage earns better pricing and higher leverage.
- Loan-to-value. Based on an appraisal that may use income, sales comparison, and cost approaches together.
- Lease quality. On leased commercial property, tenant credit, lease term remaining, and rollover risk all matter as much as the headline income.
- Sponsor experience. Your track record with similar assets affects both approval and terms.
Use our coverage ratio calculator to run the arithmetic on a residential investment property, or the commercial version for larger assets.
Eligible property types
Commercial mortgages cover a wide range of assets, and lender appetite varies considerably by type:
- Multifamily and apartment buildings — the most liquid commercial asset class
- Industrial and warehouse — strong lender appetite in most markets
- Retail and strip centres — tenant mix and lease terms drive the underwrite
- Office — occupancy and lease rollover are scrutinised closely
- Mixed use — the residential-to-commercial ratio determines the program
- Self storage, mobile home parks, and hospitality — specialist programs
- Land and ground-up construction — different structure and draw mechanics
Borrowing through an entity
Commercial mortgages are normally made to an entity rather than an individual — an LLC, LP, or corporation formed to hold the asset. That is standard practice and expected, unlike residential lending where entity vesting is prohibited.
Form the entity in advance, in the appropriate state, with an operating agreement naming an authorised signer. A personal guarantee is typically required from the principals. See commercial mortgages for an LLC for the detail.
The process
- Scenario review. Property, purchase price or value, income, and your plan. This is where the deal is priced.
- Term sheet. Rate, leverage, term, amortisation, prepayment structure, and recourse — all in writing before you spend money.
- Due diligence. Appraisal, environmental assessment where applicable, title, survey, and lease review.
- Underwriting. Property income and borrower documentation reviewed together.
- Closing. Entity documents, insurance, and funding.
The single biggest timeline variable on commercial files is third-party reports — appraisal and environmental in particular. Order them early rather than waiting for a conditional approval.
Program parameters vary by lender and property type and change with market conditions. Figures here describe what is typical across the commercial and business-purpose market — they are not a quote. Send us the scenario for real numbers.
