So what requirements are there if you want to get a commercial loan?
There is definitely a difference between residential and commercial loans, and understanding that difference is the first step.
With residential investment loans, you can finance one- to four-unit properties pretty easily. The bank is going to look at your job income, and they will also factor in the rental income from the property. You can typically have up to ten of those loans.
But once you reach that threshold, or you want to buy a property with five units or more, you move into the world of commercial lending. And that changes how the loan is evaluated.
How Commercial Loans are Factored
With a commercial loan, the bank is not primarily looking at your job income the way they do with a residential investment loan. Instead, they are looking at the property itself and your overall net worth.
One of the main tools they use is something called a debt service coverage ratio. This simply means the property needs to make more money than it costs to operate and service the debt.
Typically, lenders require a debt service coverage ratio of 1.25. In plain terms, that means the property must generate 25% more cash than the total expenses, including the mortgage and interest payments.
If the numbers do not meet that threshold, the bank will not be comfortable making the loan.
What is a Global Debt Service Coverage Ratio?
Lenders may also look at something called a global debt service coverage ratio. This takes into account your entire financial picture.
Let’s say the property you are buying does not quite cash flow enough on its own. If you have other investments that are generating strong income, the bank can consider that additional cash flow. They will also look at your overall net worth.
So if you own a lot of property, have passive income from other investments, or have strong financial reserves, the lender may be willing to work with you even if the individual property is slightly weaker on its own.
The key point is that commercial lending looks at the bigger picture. It is not just about your W-2 income. It is about your entire financial position and the performance of the asset.
Personal Guarantees
One important thing to keep in mind is that almost all banks require a personal guarantee.
A personal guarantee means you are standing behind the loan with all of your other income and assets. If the property does not perform, the bank has recourse to you personally.
That is one of the reasons lenders look at both the property’s debt service coverage ratio and your global coverage ratio. They want to see that you have the ability to support the loan if something goes wrong.
There are a few exceptions. For example, CMBS loans generally do not require a personal guarantee. However, those loans come with much stricter underwriting standards. They are not typically for beginning investors. They also usually require a much higher down payment.
The reason is simple. Without a personal guarantee, the lender wants to make absolutely sure the property has excess cash flow above its expenses. The underwriting is tighter because the lender does not have the same personal recourse.
Final Thoughts
Commercial loans are structured very differently from residential loans. Once you move beyond four units, lenders shift their focus from your job income to the property’s performance, your overall net worth, and your ability to support the loan. Debt service coverage ratios and personal guarantees become central to the conversation.
Many investors we work with appreciate understanding these requirements before they approach a lender. If you are planning to purchase a commercial property and want to position yourself well for financing, contact us to discuss your strategy and next steps.
