Where the Line Is

Residential financing covers 1–4 unit properties. Anything 5+ units (apartment buildings) or any non-residential property (office, retail, industrial, mixed-use, hotel, self-storage) is commercial.

Commercial loans are made by banks, life insurance companies, debt funds, and the federal government (Freddie Mac and Fannie Mae have multifamily products). Underwriting is property-first, borrower-second.

The Big Structural Differences

  • Term vs. amortization: A commercial loan is often a 5- or 10-year term with a 25- or 30-year amortization. That means a balloon payment at the end of the term. Plan for refinance or sale.
  • Recourse vs. non-recourse: Smaller commercial loans are usually recourse (personal guarantee). Larger loans ($1M+) and most agency multifamily are non-recourse.
  • Underwriting: Based on the property's net operating income and debt service coverage ratio (NOI / debt service), not your personal income.
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Where Residential Ends

Anything 5+ units (apartment buildings) or any non-residential property (office, retail, industrial, hotel, self-storage) is commercial — even if it looks like a house from the street.

Key Metrics Lenders Care About

  • DSCR (Debt Service Coverage Ratio): NOI ÷ annual debt service. 1.20–1.25 minimum for most lenders.
  • LTV: 65–75% for commercial, sometimes 80% for owner-occupied or strong multifamily.
  • Debt yield: NOI ÷ loan amount. Lenders want 8–10% on stabilized properties.
  • Cap rate: NOI ÷ purchase price. Compared against the loan constant to test if leverage is accretive.
1.20–1.25
Min DSCR
65–75%
Typical LTV
5–10 yr
Common term
25–30 yr
Amortization

Common Loan Programs

  • Bank commercial: 5/25 or 10/30 fixed/amort, recourse, 70–75% LTV. Most flexible, requires established banking relationship.
  • Life insurance company: 10–25 year fixed, non-recourse, 65–70% LTV. Lowest rates available, but requires high-quality assets.
  • Freddie Mac / Fannie Mae multifamily: For 5+ unit residential. Non-recourse, 75–80% LTV, 5–10 year terms, very competitive rates.
  • SBA 7(a) and 504: For owner-occupied commercial real estate. Up to 90% LTV with SBA guarantee.
  • CMBS: Conduit loans pooled and sold as bonds. Non-recourse, 10-year terms. Standardized but rigid — no flexibility for changes once closed.
  • Bridge/debt fund: Short-term, value-add deals. 70–80% LTV, 9–12% rates, 1–3 year terms.

Documentation Requirements

Commercial underwriting is heavier than residential. Expect to provide:

  • Personal financial statement and schedule of real estate owned
  • Last 3 years of tax returns (personal and entity)
  • Last 3 years of property operating statements (T-3, T-12)
  • Current rent roll with lease abstracts
  • Tenant estoppels (for multi-tenant properties)
  • Environmental Phase 1 report
  • Property condition report
  • Title commitment, survey, and zoning verification
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Balloon Payment Reality

A 10-year commercial loan with a 30-year amortization means a balloon at year 10. Plan for refinance or sale — don't get caught flat-footed.

Florida Commercial Notes

  • Property tax reassessment on transfer can dramatically increase NOI projections that didn't account for it.
  • Insurance for coastal commercial is brutal — get binding insurance quotes before final LOI.
  • 1031 exchanges are widely used to defer capital gains; your lender must be willing to coordinate with the exchange accommodator.
  • Wind mitigation credits substantially reduce insurance premiums — invest in them.

Considering your first commercial deal? We'll walk you through the structure.

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