A clearer way to read the terms
Helpful loan terms and definitions to help you on your way to acquiring the right commercial real estate loan to suit your needs.
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Plain-English guidance
Know what the numbers mean.
This glossary covers commercial real estate lending language generally. Some terms describe structures that are not DSCR Doctors products, and they are included for background only.
Loan glossary
A method of paying off a debt using a fixed repayment schedule agreed between the borrower and the lender. Payments consist of both principal and interest, paid off over a set period of time. More interest is paid at the beginning of the repayment schedule, and it gradually decreases over time, so more principal is paid toward the end of the loan term.
A term used to describe the large payment sum due toward the end of a commercial or amortized loan. Balloon payments usually occur on loans with short terms, and when only a portion of the principal is amortized.
Assets or property of value pledged to the lender as assurance of worth in order to secure the loan. If the borrower stops making payments, whether intentionally or due to unforeseen circumstances, the lender can seize the collateral to cover their loss. These claims on collateral are known as liens. When the loan amount is paid in full, the assets are no longer collateral. Loans secured by collateral typically carry lower interest rates.
DSCR quantifies the borrower’s ability to pay back outstanding debt obligations. “Debt service” is the cash flow required to cover a standard payment of principal and interest within a payment period. Net operating income is also required to determine the ratio. The formula is Net Operating Income ÷ Total Debt Service. A result above 1.00 shows the borrower is capable of repaying the debt; below 1.00 indicates the income does not fully cover debt service.
Try the DSCR loan calculatorA figure that represents the ratio of a debt to the value of the collateral involved. Lenders use LTV to quantify borrower leverage and to determine the level of risk in lending a given sum. The formula is Loan Amount ÷ Total Value of the collateral.
A figure that represents the income a property generates compared with the amount of the loan a lender has issued on it. It essentially represents the cash-on-cash return a lender would get if they had to foreclose on a commercial property. The formula is Net Operating Income ÷ Loan Amount.
The date the final principal payment on a loan is due. The maturity date is often viewed as the “lifespan” of a loan. Once the last principal payment is met, interest payments cease and the debt is considered fulfilled.
A standard of comparison for interest rates offered by lenders — essentially the rate given to a lender’s most creditworthy clients. Also called the prime lending rate, it is based on the assumption that these larger commercial borrowers have a much lower risk of defaulting on a payment.
Debt payments are typically broken into two parts. Principal is the original sum of money borrowed from the lender. Interest is an amount derived as a percentage of the principal that acts as the fee for borrowing.
When a borrower meets with a lender to revise a previous payment schedule on a loan. When a debt is refinanced, the original loan is considered paid off and replaced with the newly revised payment schedule, which is viewed as a new loan altogether.
A fee charged to a commercial borrower if they repay a loan early. Prepayment penalties often come in the form of step-down penalties, which start at a specific percentage and go down by 1% per year. For CMBS and conduit loans, they usually take the form of yield maintenance or defeasance. Yield maintenance requires the borrower to compensate the lender for the interest returns they would have received had the loan not been paid off early. Defeasance occurs when a borrower purchases a basket of securities, typically U.S. Treasury bonds, to replace the collateral of their loan.
A non-recourse loan is one in which a lender cannot pursue a borrower’s personal assets if they default on the debt. However, most non-recourse loans have “bad boy” carve-outs, which stipulate that the loan becomes full recourse if the borrower violates certain rules, such as intentionally declaring bankruptcy or giving misleading financial information to the lender.
Questions, answered
A balloon payment is a larger payment due at the end of a loan when the regular payments have not fully paid down the balance. It may be avoidable with a longer amortization or a loan structure that matches the maturity date to the full repayment schedule, depending on the lender and the property.
Commercial mortgage rates vary with the property, loan amount, leverage, borrower profile, loan term, and market conditions. Rates can also differ between fixed, adjustable, bridge, and other loan structures, so a lender reviews the full deal before sharing terms.
Many lenders look for a DSCR around 1.00 or higher, while some programs and properties may target 1.20 or 1.25. The threshold depends on the property income, expenses, loan structure, leverage, and the lender’s guidelines.
Residential DSCR loans generally focus on one- to four-unit investment properties and the rent they can produce. Commercial DSCR loans often cover larger or more complex properties and place more emphasis on net operating income, leases, expenses, and the property’s operating history.
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