MULTIFAMILY
1. Conventional Mortgage for Multifamily Properties
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Conventional mortgages for buying a multifamily home are permanent “conforming” loans offered by traditional banks and lending institutions. These mortgages have terms of 15 to 30 years and can finance multifamily properties between two and four units but can’t finance apartment buildings with five or more units. Conventional mortgages are conforming because they typically adhere to Fannie Mae’s required qualifications and maximum loan amounts. However, they aren’t backed by the federal government. Conventional mortgages for multifamily homes are right for investors who want a long loan term. They’re right for investors who purchase a multifamily property that has already been rehabbed. They’re also right for investors who already have a banking relationship with a financial institution that offers multifamily loans.
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Multifamily Conventional Mortgage Loan Amounts
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Conventional multifamily loan amount and down payment are:
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Two-unit property: $533,800 to $800,755
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Three-unit property: $645,300 to $967,950
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Four-unit property: $801,950 to $1,202,925
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LTV: Up to 80 percent
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Down payment: 20 percent or more
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Keep in mind that these maximum loan amounts are regional and higher cost areas like Hawaii have higher maximum loan limits. An investor’s typical down payment with a conventional multifamily loan is 20 percent or more of the property’s purchase price. This is fairly standard when compared to more traditional residential property loans.
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Conventional Multifamily Loan Rates
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Conventional multifamily mortgage costs are generally:
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Rates: 4.5 percent to 6.5 percent
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Loan origination fees: 0 percent to 3 percent
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Closing costs: 2 percent to 5 percent
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The rates found on a conventional mortgage can be either fixed or variable. Fixed rates are fully amortized throughout the loan’s term while variable rates typically reset after a seven- to 10-year period. Variable interest rates are based on the six-month stated Intercontinental Exchange London Interbank offered rate (LIBOR), and there is usually a cap equal to the starting interest rate plus 5 percent to 6 percent.
You might also be charged a minimum $500 appraisal fee as well as an application fee that’s typically around $100 to $200. The application fee will sometimes cover the appraisal. Loan origination fees and closing costs are typically taken directly out of the loan.
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Multifamily Conventional Mortgage Terms
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Conventional multifamily mortgage terms are generally:
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Term: 15 to 30 years
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Funding time: 30 to 45 days
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Conventional Multifamily Mortgage Loan Requirements
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Conventional multifamily loan qualifications are generally:
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Units: 2 to 4
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Credit score: 680 or more (check your credit score for free here)
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DSCR: 1.25 or higher, which is the amount of cash flow available to cover debt payments
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Cash reserves: 6 to 12 months
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If you have a property with five or more units, you’ll want to look into government-backed multifamily loans and multifamily portfolio loans. Further, conventional mortgages typically don’t finance a rehab or renovation project. Therefore, the second qualification you need to mind is that all multifamily properties have to be in good condition prior to financing.
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2. Government-backed Multifamily Financing
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Government-backed multifamily financing is multifamily loans sponsored by Fannie Mae and Freddie Mac as well as the Federal Housing Administration (FHA). There are more than five government-backed multifamily financing options, which can either finance properties with two to four units or properties with five or more units.
Government-backed multifamily loans are right for investors who want to live in one of the units and rent out the other units. Investors who only have a small down payment can also benefit from government-backed multifamily loans. They’re also right for larger investors who want to purchase a five or more unit property with an FHA multifamily loan.
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Government-backed Multifamily Financing Loan Amounts & Down Payment
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Government-backed loan amount and down payments are generally:
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Two-unit property: $533,800 to $800,755
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Three-unit property: $645,300 to $967,950
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Four-unit property: $801,950 to $1,202,925
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LTV: Up to 80 percent
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Down payment: 3.5 percent or more
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“Many investors don’t realize that they can use an FHA loan with a down payment as low as 3.5 percent to purchase a multifamily residence. This low down payment generally gives you more buying power and lets you afford to purchase a nicer property in a better neighborhood. They can also add up to 75 percent of their monthly rental income to their earning when they’re ready to qualify to buy another property.” — Odest T. Riley Jr., President, WLM Financial
Fannie Mae and Freddie Mac also have multifamily financing loans that can finance properties with five or more units. These government-backed loans are often referred to as “small balance loans” or “multifamily loans.”
Government-backed loans have the following loan amounts:
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Fannie Mae: $750,000 to $3 million or more
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Freddie Mac: $1 million to $6 million or more
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The FHA offers multifamily loans for properties with five or more units. The minimum loan amount is $1 million and there is no maximum amount. However, the FHA 223(f) apartment loan can finance up to 87 percent of a property’s LTV, meaning that the down payment would only be 13 percent or more of the purchase price.
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Government-backed Multifamily Loan Rates
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Government-backed multifamily loan rates include:
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Rate: 5 percent to 7 percent or higher
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Loan origination fees: 0 percent to 1 percent
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Closing costs: 2 percent to 5 percent
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Prepayment penalty: 1 percent
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These costs are usually taken directly out of the loan and aren’t considered out-of-pocket costs. Fannie Mae and Freddie Mac multifamily loans with longer terms have fixed rates that are fully amortized and shorter-term loans can have fixed or variable rates. FHA rates are fixed over the entire term. Fixed rates are typically amortized over the term of the loan while variable interest rates adjust after three to 10 years based on the current six-month LIBOR rate.
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In contrast, FHA 223(f) loan costs are generally:
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Loan origination fees: 0 percent to 3 percent
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Closing costs: 2 percent to 5 percent
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FHA inspection fee: 1 percent or more
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Mortgage insurance premium: 1 percent
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Legal fees: $10,000 or more
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Government-backed Multifamily Financing Terms
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The terms for government-backed multifamily loans are:
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Term: 5 to 35 years
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Funding time: 60 to 180 days
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Both Fannie Mae and Freddie Mac multifamily loans have terms between five and 35 years. The time to approval and funding with these multifamily loans can be 60 to 90 days. For FHA-backed multifamily loans, the term can be as long as 35 years. Because there are more regulations and guidelines with FHAloans, the time to approval and funding is longer at 60 to 180 days.
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Government-backed Multifamily Mortgage Loan Requirements
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The qualifications for government-backed multifamily loans are:
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Units: 2 or more
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Credit score: 650 to 680 or higher (check your credit score for free here),
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DSCR: 1.25 or higher, which is the amount of cash flow available to cover debt payments
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Occupancy: 85 percent to 90 percent or more
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Liquidity: At least 9 months
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Occupancy: At least 3 months
FHA multifamily loan qualifications are:
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Units: 5 or more
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Credit score: 650 or higher (check your credit score for free here),
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DSCR: 1.15 or higher
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Occupancy: 95 percent or higher
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Liquidity: At least 9 months
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Occupancy: At least 6 months
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Fannie Mae and Freddie Mac’s multifamily financing options together can fund the purchase of a multifamily property between two and five units or more. Just remember that the conforming loans can finance properties between two and four units while the nonconforming multifamily loans can finance properties of five or more units.
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3. Portfolio Loan for Multifamily Properties
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A portfolio loan for multifamily properties is a nonconforming loan used to purchase a multifamily property between two and five or more units. Portfolio loans for multifamily properties are permanent mortgages with terms between three and 30 years.
These types of multifamily loans are right for investors who need more flexible multifamily loan requirements. They’re also right for investors who want to finance multiple properties at once because they can finance four to 10 properties simultaneously.
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Multifamily Portfolio Loan Financing Amounts & Down Payment
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Multifamily portfolio loan amount and down payment are generally:
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Minimum loan amount: $100,000 or more
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Maximum loan amount: Depends on the lender
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LTV: Up to 97 percent
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Down payment: 3 percent or more
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Portfolio loans for multifamily financing aren’t required to meet Fannie Mae or the other government organization’s requirements for maximum loan amounts and down payments. This means that portfolio loans are more flexible than conforming multifamily loans.
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Portfolio Multifamily Loan Rates
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Portfolio multifamily loan rates are generally:
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Rates: 5 to 6 percent or higher
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Loan origination fees: 0 percent to 3 percent
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Closing costs: 2 percent to five percent
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Prepayment penalty: 1 percent
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These costs are taken directly out of the loan and their interest rates can be either fixed or variable. Like the other multifamily loans, variable interest rates are typically fixed for five to 10 years before adjusting every six months based on the six-month LIBOR rate.
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Multifamily Portfolio Loan Terms
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Terms for multifamily portfolio loans are generally:
Term: 3 to 30 years
Funding time: 30 to 45 days
The most common types of portfolio loans for multifamily financing will often have a term of 15 to 30 years. The usual time to approval and funding is between 30 to 45 days.
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Portfolio Multifamily Mortgage Loan Requirements
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Portfolio multifamily loan qualifications are generally:
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Units: 2 to 5 or more
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Credit score: 600 or higher (check your credit score for free here),
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DSCR: 1.25 or higher
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Occupancy Rate: 90 percent or higher
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Liquidity: 9 months or more
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Occupancy: 3 months or more
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4. Short-term Multifamily Financing
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Short-term multifamily financing is a nonpermanent multifamily loan option with terms that range from six to 36 months. These loans include both hard money loans and bridge loans with monthly payments that are usually interest-only.
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Short-term multifamily financing loans are right for investors that want to season, renovate or increase the occupancy a multifamily property in order to meet the stricter requirements of a permanent multifamily loan. Furthermore, some investors use these nonpermanent options to buy a property and wait until they meet the personal qualifications before refinancing.
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Short-term Multifamily Financing Loan Amounts & Down Payment
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Short-term multifamily loan amounts and down payments are generally:
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Minimum loan amount: $100,000 percent
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Maximum loan amount: Varies by lender
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LTV: Up to 90 percent
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LTC: Up to 75 percent
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Down payment: 10 percent or more
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The LTV ratio is based on a multifamily property’s current fair market value and is used to finance properties in good condition. The loan-to-cost (LTC) ratio, on the other hand, is based on the combined costs of purchasing and renovating a multifamily property and is used for properties in poor condition. This means that an investor should expect to cover 10 percent or more of a property’s purchase price or 25 percent or more of a property’s purchase price plus renovation costs.
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Short-term Multifamily Loan Rates
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Rates on short-term multifamily loans are generally:
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Hard money loan rates: 7.5 to 12 percent or more
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Bridge loan rates: 5 to 12 percent or more
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Loan origination fees: 1 percent to 3 percent
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Exit fee: 1 percent
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Extension fee: 1 percent
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Prepayment penalty: 1 percent
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These costs are typically taken out of the loan and don’t come out-of-pocket. The interest rates found on short-term multifamily financing options vary widely depending on the type of loan and the lender.
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Short-term Multifamily Financing Terms
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Short term multifamily financing terms are typically:
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Term: 6 to 36 months
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Funding time: 10 to 45 days
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The terms of a nonpermanent multifamily financing option are short and typically between six to 36 months. This means that investors will typically either have to flip the property or refinance with a permanent multifamily loan at the end of the term.
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However, the time to approval and funding is also short, making it advantageous for investors who need to compete with all-cash buyers. For hard money loans, the typical time to funding is between 10 to 15 days. For bridge loans, the time to funding is between 15 to 45 days.
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Short-term Multifamily Mortgage Loan Requirements
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The qualifications of short-term multifamily financing are generally:
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Units: 2 to 5 or more
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Credit score: 550 or higher (check your credit score for free here),
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Experience: 2 or 3 past rehab projects or multifamily experience
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Subordinated debt: None
Typically bridge loan qualifications are:
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Units: 2 to 5 or more
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Credit score: 640 or higher (check your credit score for free here),
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Experience: 2 or 3 past rehab projects or multifamily experience
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Subordinated debt: None
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Interest reserve: Required for properties below 1.05 debt-service coverage ratio (DSCR)