A Deep Dive into Commercial Mortgage Options for Real Estate Investors
The main types of commercial mortgage, the terms that decide how much you can borrow, and how pre-approval, underwriting and syndicated loans work.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A commercial mortgage is a loan secured by income-producing property: an apartment building with five or more units, a hotel, a shopping centre, an office or industrial building. Unlike a home mortgage, it is underwritten mainly on the property’s income, and the borrower is usually a company rather than a person.
This guide is for investors arranging their first commercial loan. It covers the main types of commercial mortgage, the few numbers that decide how much you can borrow, and how pre-approval and underwriting work, with short notes on syndicated loans. It is general information; speak to a lender, broker or lawyer about your own deal.
The main types of commercial mortgage
| Type | Who lends | Typical use | Points to know |
|---|---|---|---|
| Conventional bank or credit union loan | Balance-sheet lenders | Most property types; construction and term loans | Flexible structure; often a personal guarantee; terms commonly shorter than the amortization |
| Insured multifamily loan | Approved lenders, insured by CMHC (Canada) or FHA/HUD (U.S.) | Rental apartment buildings | Highest leverage and longest amortization; insurance premium and program conditions |
| Agency loan (U.S.) | Lenders selling to Fannie Mae or Freddie Mac | Stabilized apartment buildings | Long fixed terms; non-recourse available; yield maintenance on early repayment |
| Life insurance company loan | Insurers | High-quality stabilized property | Low rates, lower leverage, selective |
| CMBS (conduit) loan | Lenders that pool loans into bonds | Stabilized commercial property and hotels | Usually non-recourse; rigid once closed; prepayment by defeasance or yield maintenance |
| Bridge or private loan | Debt funds, private lenders | Transitional property, quick closings | Short term, higher cost, interest-only |
| Syndicated loan | Several lenders sharing one loan | Large loans beyond one lender’s limit | One agent bank runs the loan; more parties to approve changes |
For a full comparison of lender types, see traditional lenders vs. alternative funding sources.
The numbers that decide your loan
Three tests limit how much a commercial lender will lend. The loan is the lowest amount that passes all of them.
- Loan-to-value (LTV): the loan divided by the appraised value. U.S. banks follow supervisory limits of 85% for improved property, 80% for commercial and multifamily construction and 65% for raw land, and usually set lower internal limits.[1] Insured apartment loans go higher: CMHC’s MLI Select allows up to 95% on new construction for qualifying projects.[2]
- Debt service coverage ratio (DSCR, or DCR in Canada): the property’s net operating income divided by the annual loan payments. Fannie Mae’s standard conventional loan requires at least 1.25;[3] CMHC’s MLI Select requires at least 1.10 for standard rental housing.[2] Hotels and riskier properties are usually held to higher ratios.
- Debt yield: net operating income divided by the loan amount. Some lenders, especially CMBS lenders, use it as a floor because it does not depend on the interest rate or amortization.
Example. A building earns $500,000 a year in net operating income. At a required DSCR of 1.25, the lender will allow annual loan payments of up to $400,000 ($500,000 ÷ 1.25). The interest rate and amortization then decide how large a loan $400,000 a year will carry. If the appraisal supports $8 million and the LTV limit is 75%, the loan is also capped at $6 million. Whichever figure is lower wins. These figures are illustrative only.
Other terms that matter
- Term and amortization. Commercial loans often have a term (when the balance is due) shorter than the amortization (the period used to calculate payments), leaving a balloon payment at maturity. Fannie Mae’s conventional loans, for example, run 5 to 30 years with amortization of up to 30 years.[3]
- Fixed or floating rate. Floating rates are set as a margin over a benchmark: in Canada, often the Canadian Overnight Repo Rate Average (CORRA), which the Bank of Canada calls Canada’s risk-free rate, and in the U.S., the Secured Overnight Financing Rate (SOFR).[4][5]
- Prepayment. Many commercial mortgages are closed or carry a penalty. Fannie Mae fixed-rate loans can be prepaid on payment of yield maintenance.[3] In Canada, section 10 of the Interest Act lets a borrower repay a mortgage with a term over five years after five years, with three months’ interest, but it does not apply to mortgages given by a corporation, which covers most commercial borrowers.[6] Our guide to refinancing explains these costs.
- Recourse. Whether you or a guarantor are personally liable if the property does not cover the debt. See recourse vs non-recourse loans.
Pre-approval and underwriting
Commercial lending has no standard pre-approval like a home mortgage. What investors call pre-approval is usually a lender’s early indication, a letter of interest or a non-binding term sheet, based on a quick look at the property and the borrower. It is useful because it tells you, before you commit to a purchase, roughly how much you can borrow and on what terms, and it shows a seller you are a credible buyer. It is not a promise to lend.
From first call to funding
Initial package
Purchase agreement or property details, rent roll, two or three years of operating statements, and the borrower’s financial statements and experience.
Term sheet or letter of interest
The lender sets out proposed amount, rate, term, amortization, fees, recourse and conditions. Often a deposit is required to proceed.
Third-party reports
Appraisal, environmental site assessment and building condition report. Fannie Mae, for example, requires all three on its conventional loans.
Full underwriting
The lender verifies income and expenses, tests the loan against its LTV, DSCR and debt yield limits, and reviews the borrower and any guarantors.
Commitment letter
The binding offer, with final terms and the conditions that must be met before funding.
Legal work and funding
Lawyers prepare the mortgage and loan documents, title is checked and insured, and the loan is advanced.
The step-by-step requirements above are typical; the third-party report list is from Fannie Mae’s term sheet.[3] Construction loans add a cost review and monthly draw inspections.
Syndicated loans, in brief
When a loan is too large for one lender, or a lender wants to limit its exposure to one property, several lenders can share it. In a syndicated loan, an agent or lead lender arranges the loan, documents it and administers it, while each participant funds a share. For the borrower, the loan works like a single loan, but changes, extensions and waivers may need approval from a majority or all of the lenders, which takes time. Syndicated and participated loans are most common on large construction projects and portfolios, not on typical single buildings.
Sources
- Interagency Guidelines for Real Estate Lending Policies (12 CFR Appendix C to Subpart K of Part 208) — Legal Information Institute, Cornell Law School (text of the U.S. regulation). Checked 2026-10-12.
- MLI Select — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
- Multifamily Term Sheet: Conventional Properties — Fannie Mae, 2026. Checked 2026-10-12.
- Canadian Overnight Repo Rate Average — Bank of Canada. Checked 2026-10-12.
- Secured Overnight Financing Rate Data — Federal Reserve Bank of New York. Checked 2026-10-12.
- Interest Act (R.S.C., 1985, c. I-15), section 10 — Justice Laws Website, Government of Canada. Checked 2026-10-12.
