To finance a commercial property, you’ll generally need a down payment of 20 to 35 percent, a property that produces enough income to cover the mortgage payment by at least 25 percent, and a loan process that runs 30 to 90 days from application to closing. Commercial loans work differently from home mortgages: terms are shorter, underwriting focuses on the property’s income rather than your paycheck, and paying the loan off early can carry heavy penalties. The two decisions that most affect whether your deal closes on time and on budget are which loan type you choose and how prepared your paperwork is when you apply.
What You’ll Need to Qualify
Commercial lenders start with the property, not the borrower. The key number is the debt service coverage ratio, which divides the property’s annual net operating income by the annual mortgage payment. Most lenders want a DSCR of at least 1.25, meaning the property earns 25 percent more than it costs to service the debt. A ratio below that signals thin margins, and the loan either gets repriced, resized, or declined.
The second number is the loan-to-value ratio. Commercial LTVs are typically capped between 65 and 80 percent, so plan on 20 to 35 percent down. The exact figure depends on the property type, the loan program, and your overall financial picture.
Credit still matters, on both the personal and business side. For conventional commercial loans, a personal FICO score of 680 or higher is a common benchmark, though individual lenders set their own thresholds. For the SBA 7(a) program, the SBA does not publish a minimum personal FICO but uses the FICO Small Business Scoring Service (SBSS) as a pre-screen, with a current minimum SBSS score of 165 for 7(a) small loans.1U.S. Small Business Administration. 7(a) Loan Program
Expect to sign a personal guarantee, especially as a small business borrower. That makes you personally liable if the business defaults, giving the lender recourse against your personal assets. Lenders also run a global cash flow analysis, looking at your liquid reserves, net worth, and every other debt you carry, personal and business, to confirm you can absorb a vacancy or a major repair without missing payments.
Choosing the Right Loan Type
The loan that fits depends on the property, your timeline, and whether you qualify for government-backed programs. Rates as of early 2026 for conventional commercial mortgages run roughly from the high 4-percent range to the mid-8-percent range, depending on property type, credit, and market conditions.
Traditional Commercial Mortgages
Banks and credit unions originate these and keep them on their own books. A typical structure runs 5 to 10 years on a 25-year amortization schedule: your monthly payment is sized as if you had 25 years to pay, but the remaining balance comes due as a balloon at the end of the shorter term. That means you’ll need to refinance or sell before the balloon hits.
SBA 7(a) Loans
The SBA 7(a) program is the Small Business Administration’s most common loan. The SBA guarantees up to 85 percent of loans of $150,000 or less and up to 75 percent of loans above $150,000, with a maximum loan amount of $5 million.2U.S. Small Business Administration. Terms, Conditions, and Eligibility That guarantee lowers the lender’s risk and often produces better terms and smaller down payments for small business borrowers. 7(a) funds can be used to buy real estate, refinance existing debt, or cover working capital.
SBA 504 Loans
The 504 program is built specifically for buying major fixed assets: land, buildings, and heavy equipment. It uses a three-part structure through a Certified Development Company. A third-party lender funds about 50 percent, an SBA-backed debenture covers up to 40 percent, and you put in at least 10 percent as equity.3U.S. Small Business Administration. 504 Loans Startups and special-use properties may need to contribute up to 20 percent. The SBA portion carries a fixed rate set by the SBA and approved by the Secretary of the Treasury, and the maximum debenture is $5.5 million.4eCFR. 13 CFR Part 120 Subpart H – Development Company Loan Program (504)
CMBS (Conduit) Loans
Conduit loans are pooled and sold to bond investors on the secondary market. Because the lender doesn’t hold the loan long-term, CMBS loans often come with non-recourse provisions, meaning the lender’s recovery is limited to the property if you default. The trade-off is rigidity. Prepayment penalties are strict, and modifications before maturity are difficult. These loans fit stabilized, income-producing properties you plan to hold for the full loan term.
Bridge Loans
Bridge loans are short-term financing that covers a gap while you arrange permanent funding or stabilize a property. A common use: buy quickly, renovate to raise occupancy or income, then refinance into a traditional mortgage once the property qualifies. Rates typically run 8 to 12 percent with origination fees higher than conventional loans, and terms usually run 6 to 36 months. Private lenders dominate this space.
Construction Loans
If you’re building or gutting a property, a construction loan funds the work. Payments are interest-only during construction, and you pay interest only on funds actually drawn. Lenders size these by loan-to-cost ratio, typically capped around 75 percent, so plan on 25 percent equity in the total project. When construction ends, you refinance into permanent financing or roll into a pre-arranged “mini-perm” loan that carries you until the property stabilizes.
Documents to Have Ready
Commercial loan applications ask for significantly more paperwork than home mortgages. Assembling the package before you approach a lender can shave weeks off the timeline. Plan to provide:
- Two to three years of federal tax returns for the business entity and for each individual principal or guarantor.
- Current profit and loss statements and balance sheets for the business.
- For income-producing property, a current rent roll listing every tenant, lease term, and monthly rent, plus copies of executed leases.
- Entity documents: articles of incorporation or organization, operating agreement or bylaws, and any partnership agreements, which prove the entity’s legal existence and who is authorized to sign for it.5U.S. Small Business Administration. Basic Information About Operating Agreements
- A property profile with the address, legal description from the deed, and a summary of physical condition, age, and improvements.
- A business plan explaining how the property fits your growth strategy, with financial projections covering at least two years.
SBA loans require additional forms. The 7(a) program uses SBA Form 1919, which collects ownership, existing debts, prior government financing, and background details for all owners.6U.S. Small Business Administration. Borrower Information Form The 504 program uses SBA Form 1244, completed jointly by the borrower and the Certified Development Company.7U.S. Small Business Administration. Application for Section 504 Loans
How the Process Works
From complete application to funded loan, expect 30 to 90 days. Complex deals and SBA loans can take longer.
Once the file is complete, the lender orders a commercial appraisal. These are more involved than residential appraisals because the appraiser weighs income, comparable sales, and replacement cost. Typical cost runs $2,000 to $5,000, higher for larger or unusual assets.
The lender also requires a Phase I Environmental Site Assessment to flag potential soil or groundwater contamination that could create legal liability. The Phase I follows the ASTM E1527-21 standard and involves record review, aerial photograph and regulatory database checks, and a physical inspection.8Environmental Protection Agency. Assessing Brownfield Sites If the report identifies a recognized environmental condition (a history of industrial use, a former gas station, underground storage tanks), the lender will likely require Phase II sampling. Phase I typically runs $2,000 to $6,000, and Phase II adds substantially to that.
Before closing, you’ll need to secure insurance and name the lender as an additional insured or loss payee. Standard requirements include replacement-cost property insurance on an all-risk basis, general liability coverage of at least $1 million per occurrence and $2 million aggregate, and flood insurance if the property sits in a FEMA Special Flood Hazard Area. If your coverage lapses, the lender can force-place insurance at a much higher premium and bill you for it.
Underwriting brings the full picture to a credit committee: appraisal, environmental report, financials, property income, credit history. If approved, the lender issues a commitment letter with the final loan amount, rate, term, amortization schedule, prepayment provisions, and any conditions you must satisfy before closing. Read it carefully. Once you sign the loan documents at closing, those terms bind you.
At closing, a title company confirms no existing liens would challenge the lender’s priority, you buy a lender’s title policy, and you sign the mortgage or deed of trust, the promissory note, and supporting documents. Funds are wired to settle the purchase or pay off existing debt.
Closing Costs and Prepayment Penalties
Closing costs on a commercial loan typically run 2 to 5 percent of the loan amount. The line items to budget for:
- Origination fees of 0.5 to 2 percent of the loan amount.
- Appraisal: $2,000 to $5,000, more for large or complex properties.
- Phase I Environmental Site Assessment: $2,000 to $6,000.
- Title search and title insurance: $2,500 to $15,000, depending on value and jurisdiction.
- Legal fees: a few thousand dollars for a straightforward bank loan, $15,000 or more for a CMBS transaction with heavy loan documentation.
- Survey: a current boundary or ALTA survey may be required, with cost tied to property size.
- Recording fees and transfer taxes, which vary by jurisdiction; some states and counties charge a mortgage recording tax calculated as a percentage of the loan amount.
- Processing and underwriting fees of $500 to $2,500.
Many of these costs are due at or before closing whether the loan funds or not. If the deal falls apart during underwriting, you can still owe for the appraisal, environmental assessment, and other completed third-party reports. Ask your lender in writing which fees are refundable before you commit.
The other cost most borrowers underestimate is prepayment. Unlike residential mortgages, commercial loans almost always restrict early payoff, and the penalties can add hundreds of thousands of dollars to the cost of selling or refinancing. The two most common structures are yield maintenance and defeasance. Yield maintenance requires you to pay the lender the present value of the interest they would have received, adjusted by the spread between your loan rate and current Treasury yields; when rates have dropped since origination, the penalty can be substantial. Defeasance replaces the property as collateral with a portfolio of government bonds that generates the cash flows the lender expected, so the loan stays in place until maturity but the property is free to sell.9JPMorgan Chase. How Defeasance Works in Commercial Real Estate Defeasance costs include the bonds plus consultant and legal fees, and the total varies with the remaining balance, rates, and payments left.
Some loans use a simpler step-down structure, such as 5 percent of the balance in year one, 4 percent in year two, declining to 1 percent by year five. Bridge loans and some bank-held loans may allow prepayment with little or no penalty after an initial lockout period. Whatever the structure, negotiate prepayment terms in the commitment letter. Once the loan documents are signed, changing them is rarely possible.