Everything You Need to Know About FHA Multifamily Loan Requirements

As a real estate investor looking to purchase a multifamily property, one of the best loan options to consider is an FHA multifamily loan FHA multifamily loans are backed by the Federal Housing Administration and offer favorable terms for borrowing large amounts to invest in apartment buildings and other multifamily properties

In this comprehensive guide, we’ll cover all the key details and requirements for qualifying for an FHA multifamily loan. Read on to learn more about loan amounts and terms, down payments, fees, qualifying criteria, and the process of obtaining FHA financing.

Overview of FHA Multifamily Loans

The Federal Housing Administration (FHA) offers a mortgage insurance program to facilitate financing for multifamily properties with 5 or more units. These government-backed loans provide access to low down payment options and long 30-year fixed rate terms to make it more feasible for investors to purchase apartment buildings, mixed-use properties, assisted living facilities, and other multifamily developments.

FHA multifamily loans are provided through approved lenders and insured by the FHA This reduces the risk for lenders and allows them to offer more flexible underwriting standards compared to conventional multifamily mortgages.

Below are some of the main benefits of FHA multifamily financing:

• Low down payments, as low as 10%
• Fixed interest rates for 30-year loan term
• Non-recourse – the borrower is not personally liable if the property fails to perform
• Low equity requirements compared to other loan programs
• Refinancing and long-term fixed rate options available

Overall, FHA multifamily loans expand borrowing capabilities for real estate investors and make it easier to finance large apartment complexes or developments. The program supports the FHA’s mission of providing affordable housing.

FHA Multifamily Loan Amounts

FHA will insure multifamily mortgages ranging from $1 million up to very large loan amounts over $100 million dollars or more. The maximum loan limit varies based on the type and size of the property, its location, and the specific loan program used.

For market rate apartment financing, the minimum loan amount is generally $1 million. For affordable and subsidized housing, FHA can finance loans as low as $100,000.

Loan sizing is based on the value and income potential of the property. The maximum loan to value ratio can go up to 80% and potentially higher with certain approved underwriting exceptions. This allows for high leverage compared to other financing options.

Borrowers can use FHA multifamily loans to purchase an existing property or refinance an existing loan. The financing can also be used for new construction or substantial rehabilitation of an apartment project.

FHA Multifamily Loan Terms

FHA multifamily mortgages come with attractive long-term fixed rates. Initial terms are available for 30 years, 35 years, or 40 years.

The interest rate is set at closing and will remain the same for the full term of the loan. This provides the stability of knowing your monthly mortgage payments will not increase even if market interest rates rise in the future.

Depending on market conditions, current interest rates on 30-year fixed FHA multifamily loans are in the range of 4% to 6%. Rates are competitively priced relative to other types of commercial real estate financing.

FHA also allows for flexible prepayment options. As long as basic requirements are met, there are no prepayment penalties to worry about should you later decide to refinance or sell the property.

FHA Multifamily Down Payment Requirements

One of the biggest advantages of FHA multifamily financing is the low down payment requirements. FHA will finance up to 90% of the purchase price or appraised value of the property.

The minimum down payment is just 10% of the purchase price or appraised value, whichever is lower. For those purchasing a property valued at $10 million, this means putting down a minimum of $1 million as a down payment.

The flexibility on down payment amounts makes it feasible for more buyers to enter into large multifamily deals without needing to provide as much capital upfront.

For certain affordable and subsidized housing projects, FHA multifamily loans can go up to 97% of the appraised value, meaning down payments as low as 3%.

In addition to the down payment, borrowers need to factor in closing costs and required reserves which we’ll cover next. But the bottom line is FHA multifamily financing allows for high leverage and smaller down payments than other loan programs.

Fees and Closing Costs on FHA Multifamily Loans

When budgeting for an FHA multifamily purchase, expect to pay loan origination fees to the lender as well as various third-party fees and closing costs. Here are details on what’s typically involved:

Loan Origination Fee – Up to 1% of the mortgage amount. Paid to the lender for processing the loan. Can sometimes be negotiable.

Inspection Fee – Covers the cost of having properties appraised. Varies based on the size of the project.

Financing and Third-Party Fees – Title searches, document preparation, recording fees, credit reports, etc. Budget around 1% – 2% of loan amount.

Mortgage Insurance Premium – An upfront 0.25% – 1% mortgage insurance fee at closing, plus an annual 0.25% – 0.45% mortgage insurance premium paid monthly.

Interest Reserves – 6 to 12 months of interest reserves may be required at closing to cover payments during lease up periods or renovations.

Escrow and Prepaid Costs – Common requirements like prepaid insurance premiums, real estate taxes, etc.

Repair and Rehabilitation Reserves – For properties needing renovations.

Working Capital and Marketing Reserves – May be required for fill-up periods.

Closing Costs – Title fees, recording fees, etc. Typically 2% to 5% of the total amount borrowed.

Always factor in a sufficient budget for fees and closing costs when applying for an FHA multifamily loan. Actual costs will depend on the specifics of each deal.

FHA Multifamily Loan Qualifying Criteria

To qualify for FHA multifamily financing, borrowers need to meet certain credit, income, and asset requirements. Here are some of the key criteria:

• Credit Score – A minimum credit score of 620 is generally required. All borrowers must meet this threshold.

• Net Worth – Most programs require a net worth equal to at least 20% of the loan amount. Assets and liabilities are considered.

• Income and Employment – Steady verifiable income stream and 2 years employment in a similar real estate field. Self-employed borrowers can provide tax returns.

• Multifamily Experience – Previous experience owning or managing multifamily properties is necessary in most cases.

• Clean Background – No history of major bankruptcies, foreclosures, or criminal offenses.

• Property Requirements – The property itself must meet FHA standards related to location, condition, occupancy levels, potential income, etc.

• Cash Reserves – Expect to have 3 to 9 months of reserves available including financing fees and working capital minimums.

Meeting these requirements demonstrates you have the financial capacity and experience to successfully operate the property and make payments. Having an experienced mortgage broker to help navigate the process is important.

The FHA Multifamily Loan Process

The process of securing an FHA multifamily loan involves multiple steps that take an average of 60 to 180 days depending on the complexity of the deal. Here is an overview of what’s involved:

• Application – A lender will help you submit an initial application package with property information, borrower details, requested loan amount, etc.

• Underwriting – The lender will underwrite the loan looking at property feasibility, borrower qualifications, anticipated cash flows, and risk factors.

• Appraisal – An independent third-party appraisal ordered to determine property value and support the loan amount.

• Environmental Review – Properties must pass an environmental examination and meet HUD environmental standards.

• Mortgage Credit Review – Additional approval required through FHA’s Mortgage Credit Committee.

• Firm Commitment – The lender issues a firm commitment outlining final approved loan terms prior to closing.

• Closing and Funding – Final signatures on loan documents, funding of down payment and closing costs, recording security instruments.

Having an experienced lender familiar with FHA requirements is important for smoothly navigating the underwriting and approval process. Patience and diligence is required to acquire all needed approvals.

Pros and Cons of FHA Multifamily Loans

FHA multifamily financing has many attractive features for real estate investors, but there are also some potential drawbacks to consider:

Pros

• Low down payments of 10% or higher based on the project
• Fixed interest rates for long 30+ year terms
• Non-recourse financing limits personal liability
• Lower equity requirements than conventional loans
• Refinancing possible for properties with existing debt
• Backed by government rather than banks