Market Overview: Current Rates and Terms
The Federal Funds Rate target sits at 4.0-4.25% as of March 2026. The 10-Year Treasury is at 3.8-4.0%, and SOFR (Secured Overnight Financing Rate) is at 4.25-4.35%.
Banks are pricing aggressively to maintain market share, with spread compression from 2024 continuing. A quality deal with $2-3M LTV and 1.35x DSCR can hit 6.5-7.0% at a bank or 7.5-8.0% at a non-bank.
Loan Structure Components
Loan-to-Value limits vary by structure. Fixed rate loans go up to 70-75% with conservative approval at 65%. Floating rate loans max at 65-70% with 60% for conservative approval. SBA 504 loans reach 90% (including 10% equity from SBA) with 85% conservative. Conduit or CMBS loans max at 75-80% with 70-75% conservative. Bridge or transitional loans go up to 70-80% with 65-70% conservative.
Debt Service Coverage Ratio minimums also vary. Banks require 1.20-1.35x minimum DSCR with 1.25-1.30x being competitive for fast approval. Non-banks require 1.15-1.30x minimum with 1.20x competitive. SBA 504 requires 1.25-1.50x minimum with 1.30-1.40x competitive. CMBS requires 1.25-1.40x with 1.30x competitive. Hard money requires only 1.10-1.20x with 1.15x competitive. Many lenders now require trailing 12-month DSCR using actual historical NOI. Pro forma DSCR gets you in the door, but underwriting uses actuals for approval.
Fixed Rate vs. Floating Rate: The 2025-2026 Calculus
Fixed-rate loans typically have 5-10 year terms at 6.5-7.5% for banks or 7.5-8.5% for non-banks. Prepayment options vary from 10-year yield maintenance to allowing prepay after 3-5 years with penalties. Fixed rates provide certainty with your debt service locked in and refinancing risk pushed 10 years out.
Floating-rate loans have 3-5 year balloons requiring refinancing. Rates are SOFR + 200-275 bps for banks or SOFR + 275-350 bps for non-banks. Rate adjustments happen quarterly or annually. Floating rates save you money initially-if you lock 7.0% fixed today versus 5.5% floating (SOFR 4.25% plus 225 bps), floating saves $350-500 annually per $1M borrowed. But if SOFR rises to 5.25% in 2028, floating hits 7.5%.
Fee Structure Breakdown
When comparing lender quotes, look beyond the rate. Origination fees are typically 0.5-1.5% of loan amount, with banks at 0.75% and non-banks at 1.0-1.5%. Processing fees run $1,500-5,000 or may be bundled into origination. Appraisals cost $2,500-5,000 depending on property value. Underwriting is usually $0-2,000 or included in origination. Title and escrow are $1,500-3,000. Recording costs are $500-1,500 depending on jurisdiction. Total upfront costs are typically 1.5-2.5% of loan amount.
A $3M loan with 1.25% origination costs $37,500 just for origination, which affects your cost of capital calculation significantly.
Leverage Impact on Returns
Consider this example of a $5M property with $300K annual NOI, representing a 6% yield on value. At 50% LTV with a $2.5M loan at 7.0%, your debt service is $175K, leaving cash flow of $125K and a cash-on-cash return of 8.3%. At 65% LTV with $3.25M at 7.0%, debt service rises to $228K, leaving $72K cash flow and 4.8% cash-on-cash. At 75% LTV with $3.75M at 7.0%, debt service is $263K, leaving only $37K and 2.5% cash-on-cash. At 80% LTV with $4.0M at 7.25%, debt service reaches $290K with just $10K cash flow and 0.7% cash-on-cash.
At 80% LTV, you're betting heavily on value appreciation. One year of vacancy spike wipes out your returns.
Current Market Note: Rates have stabilized with lenders pricing for a 4.0% plus Federal Funds rate indefinitely. Spreads are compressing for quality loans, which is good news for borrowers. Competition between lenders is high, so shop rates aggressively.
Shopping Lenders: Key Questions to Ask
On rates, ask what the rate is for a 7-year term versus 10-year and how long the quoted rate is locked during application. Ask if you can buy down the rate with 1% more in origination fees. On terms, ask the maximum LTV for your property type and credit profile, whether they'll do interest-only periods for the first 12 months, and what their prepayment policy is (defeasance, yield maintenance, or open).
On underwriting, ask how long the underwriting decision takes, whether they use pro forma or actual NOI for DSCR calculation, and what appraisal requirement they have. On flexibility, ask if they'll waive personal guarantee if LTV is below 60%, whether they can subordinate to Phase 2 of your value-add plan, and if they offer rate lock extensions.
Red Flags in Lender Terms
Interest-only periods longer than 18 months suggest lenders doubt your cash flow. Prepayment penalties exceeding 5% after year 5 are overly restrictive. Balloons exceeding 60% of the original loan amount create refinancing risk. No explicit rate lock period means rates can change at the lender's discretion. Required cash reserves exceeding 12 months PITI are excessive. DSCR calculated on pro forma only doesn't reflect actual performance.
Frequently Asked Questions
Should I lock a fixed rate now or wait for rate cuts?
The Fed has signaled 4.0-4.25% is the neutral rate. Cuts beyond that are unlikely before 2027. If you need the property, lock fixed. Rates won't drop 50 bps this year.
How much should fees factor into my decision?
A 0.5% difference in origination fee equals $15K on a $3M loan. Shop multiple lenders; you should get at least 3-4 quotes. Fees can swing $25-50K.
Is SBA 504 worth the slower timeline?
If you can wait 4-6 months and rates are 50-100 bps cheaper, yes. For most deals, non-bank speed wins. Check if 504 saves you $30K or more in interest; if so, worth the wait.
Can I negotiate DSCR requirements down?
For quality properties with experienced sponsors, yes. Try for 1.20x versus lender's 1.25x. Relationship and cash reserves matter more than property type.