What are commercial loan terms?

May 13, 2024

When it comes to commercial real estate financing, understanding the various terms associated with commercial mortgages is crucial. Whether you are a seasoned investor or a first-time buyer, navigating through the jargon can be overwhelming. In this comprehensive guide, we aim to demystify common commercial mortgage terms to help you make informed decisions.

Loan-to-Value (LTV) Ratio

The Loan-to-Value ratio is a key factor in commercial real estate lending. It represents the ratio of the loan amount to the appraised value of the property. Lenders use this ratio to assess the risk associated with the loan. A lower LTV ratio typically indicates a lower risk for the lender.

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Debt-Service Coverage Ratio (DSCR)

The Debt-Service Coverage Ratio is another important metric lenders consider when evaluating a commercial mortgage application. It measures the property's ability to generate enough income to cover the loan payments. A DSCR of 1.25 or higher is generally preferred by lenders.

Amortization Period

The amortization period refers to the total time it will take to pay off the commercial mortgage loan. Unlike residential mortgages, commercial loans typically have shorter amortization periods ranging from 15 to 30 years. A shorter amortization period may result in higher monthly payments but lower overall interest costs.

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Interest Rate Types

Commercial mortgage loans can have different types of interest rates, including fixed-rate and adjustable-rate options. A fixed-rate mortgage offers stable monthly payments over the loan term, while an adjustable-rate mortgage may have fluctuating payments based on market conditions.

Prepayment Penalties

Prepayment penalties are fees charged by lenders if the borrower pays off the loan before the agreed-upon term. It's essential to understand the prepayment terms of your commercial mortgage to avoid any unexpected costs in the future.

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Recourse vs. Non-Recourse Loans

Recourse loans hold the borrower personally liable for the repayment of the loan, allowing the lender to go after personal assets in case of default. On the other hand, non-recourse loans limit the lender's recovery to the collateral property, providing more protection to the borrower.

Loan-to-Cost (LTC) Ratio

The Loan-to-Cost ratio is similar to the LTV ratio but focuses on the total cost of the project rather than just the property's appraised value. It considers the entire cost of acquiring and developing a commercial property, including construction costs and fees.

Loan Term

The loan term refers to the length of time the borrower has to repay the commercial mortgage loan. Loan terms can vary widely, with some loans having terms as short as one year and others extending up to 30 years.

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By familiarizing yourself with these common commercial mortgage terms, you can navigate the loan process with confidence and clarity. Remember to consult with a financial advisor or a commercial real estate expert to ensure you make well-informed decisions that align with your investment goals.