Read our comprehensive guide to find out what you need to know as an apartment investor to get the best out of your multifamily loan.In this article:
Multifamily loans are financing options that are available to real estate investors who wish to expand their portfolio beyond single-family properties. Multifamily loans are provided by a variety of institutions, including banks, credit unions, other commercial lenders, and private investors.
Multifamily loans are a great way for investors to finance the purchase, refinancing, development, or rehabilitation of a multifamily property. In this guide, we’ll explain the basics of multifamily loans, the features and advantages, and the process of applying for a loan.
Purchasing a multifamily property can be an extremely lucrative investment opportunity, allowing you to live in one unit while renting out the others. However, financing a multifamily home is more complex than getting a mortgage for a single-family residence. If you want to turn your dream of owning a multifamily property into reality, understanding your loan options is key.
In this comprehensive guide, we’ll walk through everything you need to know about getting loans for multifamily homes, including:
- Types of loans available
- Loan requirements and qualifications
- Pros and cons of different loan programs
- Tips for securing favorable loan terms
What is Considered a Multifamily Property?
Before diving into financing, it’s helpful to understand what constitutes a multifamily dwelling. The designation depends on the number of separate units the property contains:
- Single-family – 1 to 4 units
- Multifamily – 5 or more units
A duplex or triplex falls into the single-family category, while an apartment complex is considered multifamily.
When looking at mortgages this distinction is important since single-family and multifamily loans have different requirements and qualifications.
Overview of Loan Options for Multifamily Properties
There are several loan programs available that can help finance the purchase of a multifamily dwelling, whether it has 4 units or 40. Here’s an overview of some of the most common options:
FHA Loans
FHA loans are popular for single-family multifamily homes (up to 4 units) because they offer low down payments and flexible credit requirements. At least one unit must be owner-occupied.
Pros
- Down payments as low as 3.5%
- More lenient credit score and debt-to-income requirements
- Lower interest rates than conventional loans
Cons:
- Upfront and annual mortgage insurance premiums
- 4 unit max
- At least one unit must be owner-occupied
Conventional Loans
For properties with any number of units, conventional mortgages are available. Down payments are usually higher and credit requirements stricter than FHA.
Pros:
- Finance any size multifamily property
- Potentially lower interest rates than FHA
Cons:
- Typically requires 20-30% down payment
- Stricter credit score and debt-to-income requirements
Commercial Loans
For larger apartment buildings being purchased solely as investment properties, commercial mortgages may be used. Requirements depend on the property’s cash flow.
Pros:
- Finance large multifamily complexes
- Underwriting based on property performance
Cons:
- Usually require 25-30% down or more
- Higher interest rates than residential loans
- No owner-occupancy allowed
Construction and Rehab Loans
FHA 203(k) and other construction/renovation programs allow you to finance purchase plus repairs to a multifamily property.
Pros:
- Finance purchase and rehab in a single loan
- Potentially lower down payments than conventional construction loans
Cons:
- Rehab costs must meet minimum requirements
- More complex process with additional oversight and approvals
Qualifying for a Multifamily Loan
To obtain financing for a multifamily property, there are some key criteria lenders will evaluate about both you and the property:
Credit score – For FHA loans, a minimum 580 credit score is required. 620 or higher will qualify better terms. Conventional loans typically require 620+ score.
Debt-to-income ratio – Your total monthly debt payments, including the new mortgage, usually cannot exceed 45% of gross monthly income.
Down payment – FHA loans allow as low as 3.5% down, while conventional multifamily mortgages often require 20-30% down.
Loan-to-Value – The loan amount is limited by the appraised value of the property. Conventional loans sometimes allow up to 80% LTV.
Net rental income – Projected rents must exceed the proposed mortgage payment by a certain margin, usually around 25%.
Property condition – An appraisal inspection confirms the property is habitable and structurally sound.
The specific underwriting guidelines vary by lender and loan program. Be prepared to document your financials, rental income projections, and the property’s condition.
Tips for Securing a Multifamily Loan
Here are some tips to help you successfully obtain financing for a multifamily property:
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Shop multiple lenders – Compare interest rates, fees, and loan terms. Local banks may offer better deals than national lenders.
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Get pre-approved – Going through pre-approval shows sellers you’re a serious buyer and gives you negotiating leverage.
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Consult a mortgage professional – They can explain your options and help you pick the optimal loan program.
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Highlight experience – If you have previous landlord experience, focus on this during the application process.
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Clean up your credit – Pay down balances and correct any errors to maximize your credit score.
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Put down larger down payment if possible – Above 20% down can lead to better rates/terms and avoid mortgage insurance.
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Have ample reserves – Lenders want to see you have reserves to cover at least 6 months of mortgage payments.
The key is researching both property financing and your own finances. Come prepared with a complete application, and be ready to supply all documentation required by the lender.
Weighing the Pros and Cons of Multifamily Loans
Before choosing a loan program, it’s important to weigh the potential benefits and drawbacks:
Pros
- Lower down payments than conventional loans
- Easier to qualify than conventional mortgages
- Finance purchase and renovations together
- Provide rental income to offset mortgage payments
Cons
- Require owner-occupancy for FHA
- Subject to mortgage insurance premiums
- Have stricter appraisal requirements
- Limit the number of units that can be financed
As you evaluate your options, think about your plans for the property, finances, and how much ownership stake you want to have. This will help determine if an FHA, conventional, or commercial loan works best for your multifamily investment.
Partnering With a Trusted Lender
The right lender is critical for securing a multifamily mortgage tailored to your financial situation. Here are tips for finding the ideal lending partner:
- Ask friends or real estate agents for recommendations
- Review lenders’ online customer feedback and BBB ratings
- Verify they have experience with multifamily loans
- Interview loan officers to gauge customer service
- Compare interest rates and total costs to find the best value
A knowledgeable loan officer will explain the ins and outs of available programs and guide you through every step from application to closing. Relying on an experienced professional can help ensure your financing goes smoothly.
Make Your Multifamily Homebuying Dream a Reality
Whether your perfect property is a duplex, fourplex, or a 20 unit apartment complex, getting financing is achievable with the right multifamily mortgage. Understanding loan options, evaluating your financials, finding the optimal program, and partnering with a specialist lender will equip you to turn aspirations of owning a multifamily investment into reality. Use this guide’s tips to confidently navigate the loan process. Soon you’ll be collecting rental income from your dream multifamily property.
Multifamily Financing by Term Length
Permanent loans are often used to purchase or refinance a multifamily property. They are typically amortized over a period of 20 to 30 years and can come with either floating or fixed interest rates. Agency loans — think Fannie Mae and Freddie Mac loans — are generally permanent financing options, as are CMBS loans, HUD financing, and longer-term bank, credit union, or life company loans.
There are a few different short-term financing options available for multifamily properties and developments. Short-term loans typically are more expensive, with higher interest rates and fees, but they also play a unique and important role in the acquisition or development of a property. Most of these loans have terms ranging between six months and two years.
What Is Multifamily Finance?
A multifamily loan is a financing tool used for the acquisition, refinance, construction, or rehabilitation of a multifamily property. A multifamily building is literally any property where there are two or more residential units, but many multifamily loans are restricted to those assets with five or more units.
A multifamily loan is typically secured by a lien on the property, and the loan may also include additional security such as personal guarantees. The term of the loan can be anywhere from six months to 40 or more years. They arent always straightforward, and loans can be very different from lender to lender — and from borrower to borrower.