Getting a commercial multifamily loan can be a great way to finance an investment property with multiple units However, these loans come with specific requirements that borrowers need to be aware of In this comprehensive guide, we’ll walk through all the key qualification criteria, documentation, and steps involved in securing commercial multifamily financing.
What is a Commercial Multifamily Loan?
A commercial multifamily loan is a type of financing used to purchase or refinance a residential property with 5 or more units. These loans are offered by banks, credit unions, mortgage lenders and other financial institutions.
Compared to a single-family mortgage, commercial multifamily loans will have higher loan amounts and unique qualification requirements better suited for investment properties. Loan terms are also longer, often up to 30 years, to keep monthly payments affordable.
Below are some quick facts about commercial multifamily loans:
- For properties with 5+ units
- Loan amounts from $1 million to over $20 million
- Competitive interest rates, often starting around 5%
- Loan terms up to 30 years
- Commercial-grade financing
Now let’s take a closer look at the specific requirements
Commercial Multifamily Loan Requirements
When applying for a commercial multifamily loan there are several key criteria lenders will evaluate. Meeting these requirements is important to get approved and to secure the best possible loan terms.
Property Requirements
The property itself must meet certain standards to be eligible for financing. Here are some of the main requirements:
-
Minimum 5 units – The property must have at least 5 rental units. Commercial multifamily loans are not used for single-family homes or small residential properties.
-
Good condition – The property cannot have any major deferred maintenance or require immediate repairs. Regular maintenance and minor updates are acceptable.
-
Cash flowing – There must be a positive cash flow and decent rental demand for the units. Vacancy rates should not exceed 10-15%.
-
Proper zoning – The property must comply with all zoning laws and land-use regulations. No illegal conversions or unpermitted construction.
-
Title report – A preliminary title report will be ordered to verify property ownership and identify any liens or other issues.
Borrower Requirements
In addition to the property itself, the borrower must meet certain standards regarding their finances and experience:
-
Credit score – A minimum credit score of 650 is typically required, but scores of 700+ will help obtain the best terms.
-
Debt-to-income ratio – Your total debt compared to income should not exceed 45%.
-
Loan-to-value ratio – The maximum LTV on a commercial multifamily loan is usually around 80%.
-
Cash reserves – Expect to have 12 months of mortgage payments in cash reserves.
-
Investment experience – Previous experience owning and operating a commercial or multifamily property is preferred.
-
Net worth – Your assets minus liabilities, including the subject property. A higher net worth helps.
-
Skin in the game – Be prepared to contribute a down payment, often 20-25% minimum.
Required Documents
When applying for a commercial multifamily loan, here are some of the documents you should be prepared to submit:
- Rental property pro forma
- 2 years of tax returns
- Personal financial statement
- Current rent roll
- Operating statements & profit/loss statements
- Bank statements proving cash reserves
- Purchase agreement or refinance estimates
- Identification, credit reports, and other personal documents
Providing strong documentation upfront will help demonstrate you meet the lender’s requirements and will speed up the underwriting process. Expect lenders to dig deep and thoroughly verify all information.
The Commercial Multifamily Loan Process
Now that you understand the main qualification criteria, let’s look at the overall process from application to funding:
1. Choose a lender
Research and select a reputable commercial lender familiar with multifamily financing. Banks, credit unions, mortgage companies and specialty lenders all offer these loan products.
2. Submit loan application & documents
Complete the lender’s application forms and submit all required documents outlining the property, transaction details, your finances, experience, etc.
3. Property appraisal
The lender will order a commercial appraisal to confirm the property’s value supports the loan amount requested.
4. Underwriting & approval
The lender analyzes all submitted documents to assess if you meet their qualification requirements. If approved, initial loan terms will be offered.
5. Finalize loan details
Work with the lender to review the proposed loan details and modify as needed. Final terms will be agreed upon before closing.
6. Funding
At the closing, documents are signed to secure the financing. Loan funds are then wired to complete the purchase or pay off the refinanced loan.
From application to funding typically takes 30-60 days. Experience lenders with a streamlined process can potentially close loans faster.
Tips for Securing a Commercial Multifamily Loan
Here are some final tips to help you successfully obtain commercial multifamily financing:
-
Seek out lenders familiar with this type of real estate. They will best understand its nuances.
-
Organize all required documents upfront to demonstrate you meet the lender’s criteria.
-
Be upfront about any potential issues or vulnerabilities that may come up. Don’t try to hide anything.
-
If your qualifications are borderline, offer a larger down payment or get a guarantor to strengthen the loan application.
-
Shop rates from multiple lenders to find the most competitive terms. Consider both online lenders and commercial banks.
-
Negotiate the loan terms if the initial offer isn’t ideal. Ask about points, fees and loan term flexibility.
With proper preparation and understanding of commercial multifamily loan requirements, investors can secure financing to expand their real estate portfolios. Just remember these loans require extensive documentation and strict due diligence from lenders. Going in informed and ready to comply can lead to a smooth process and favorable outcome.
Different types of multi-family real estate
Multi-family real estate covers a wide range of residential properties. It includes:
- Duplexes: A duplex is a multi-family building with two residential units. It’s a single property with two separate entrances, one for each unit. The properties could be side-by-side or on separate floors. Similarly, you could have a triplex (three residences) or a fourplex (also referred to as a quadplex, which houses four homes).
- Townhouses: In a townhouse, two families live in the same house, but an interior wall separates the residential units.
- Semi-detached houses: This is a single-family house that shares a wall with the next home.
- Apartments: A multi-story building with several residences. An apartment building could contain hundreds of apartments.
Different types of multi-family commercial loans
There are many borrowing options for investors looking for multi-family commercial loans:
Financial institutions like banks and life insurance companies offer multi-family loans. To understand how these loans work, look at the multi-family commercial loan provided by JPMorgan Chase, a prominent lender in this category.
JPMorgan’s loans are available for borrowers investing in apartment buildings with five or more units. The loan amount typically ranges from $500,000 to $25 million. In certain instances, the bank lends sums over $25 million.
The loans are available only to purchase or refinance “stabilized multi-family properties”. To qualify as “stabilized”, the property must have a minimum occupancy level of at least 85% in addition to meeting certain other conditions.
Commercial mortgage-backed securities or CMBS loans can give investors the funds they need to purchase a multi-family property. These loans are securitized and sold to investors.
CMBS loans usually carry high prepayment penalties. The purpose of these penalties is to incentivize borrowers to continue making regular payments against the sum they have borrowed instead of repaying the loan early. JPMorgan Chase, Wells Fargo, and Goldman Sachs are some of the biggest CMBS lenders.
The Federal Housing Administration (FHA) is a United States government agency under the U.S. Department of Housing and Urban Development. One of its programs – Mortgage insurance for purchase or refinancing of existing multi-family rental housing – insures the loans taken by multi-family property buyers. To be clear, the loans are provided by private lenders regulated by the FHA. These loans carry a government guarantee.
FHA loans come with several distinct advantages. They have long terms which can extend up to 35 years. Additionally, borrowers usually get the benefit of higher leverage with these loans. However, the greatest drawback with these loans is that the FHA rules stipulate certain occupancy restrictions. Borrowers are required to live in one of the multi-family units. This can be a dealbreaker for many investors.
How A Commercial Loan Works? | Co/LAB Lending
FAQ
What kind of credit do you need for a commercial loan?
|
Term loan
|
While banks and credit unions typically require a score of 670 or above, online lenders may only require a score of 500
|
|
Equipment loan
|
Since equipment loans are secured by the equipment you purchase, you could get approved with a minimum credit score of 550
|
How do I qualify for a multi-family commercial loan?
The criteria a property must meet to be eligible for a multi-family commercial loan: Bear in mind that multi-family commercial loans are a form of asset-based lending. Therefore, it’s essential that the property has an acceptable occupancy rate.
What are the requirements for a government-backed multi-family commercial loan?
Government-backed multi-family commercial loans usually require a minimum of 650. Loan-to-cost ratio: The loan-to-cost ratio or LTC is the number that reveals the ratio of debt to the overall cost of the project. Remember that the LTC is different from the loan-to-value or LTV ratio. Lenders typically stipulate an LTC of between 50% and 75%.
What is a multi-family commercial loan?
It’s important to remember that although a building with two to four residential units is a multi-family property, a multi-family commercial loan refers to funds that are advanced for a five (or more)-unit asset. Why? Because banks and other lenders define commercial real estate as residential properties with five or more units.
What is a multifamily loan?
Multifamily loans are commercial term loans for apartment buildings with five or more units. Chase provides term financing from $500,000 to $25 million or more to purchase or refinance stabilized multifamily properties.