Commercial real estate loans follow different underwriting standards than residential mortgages. Understanding what lenders evaluate helps investors structure transactions for approval and favorable terms.
Property Analysis First
Commercial lenders underwrite properties, not borrowers (though both matter). Debt Service Coverage Ratio (DSCR) measures whether property cash flow covers loan payments. Lenders typically require 1.25x DSCR minimum—if annual debt service is $100,000, property must generate $125,000 NOI.
Property Quality and Location
Institutional-quality properties in primary markets get best terms: 65-75% LTV, 20-25 year amortization, 4-6% rates. Secondary markets, older properties, or niche uses require more equity (50-60% LTV) with higher rates (6-8%) and shorter terms.
Borrower Financial Strength
Lenders examine global net worth, liquidity, and real estate experience. Prefer net worth 2x loan amount and post-closing liquidity of 12-18 months of debt service. First-time commercial investors face scrutiny—partnering with experienced operators improves approval odds.
Loan Structure Elements
Terms typically 5-10 years despite 20-25 year amortization, creating balloon payments. Recourse vs non-recourse: Most loans require personal guarantees. Interest-only periods reduce early payments but require higher equity. Prepayment penalties lock borrowers in—negotiate yield maintenance vs step-down penalties.