MULTI-FAMILY LOANS

MULTI-FAMILY APARTMENT LOANS

Multi-family or apartment loans are used to purchase income producing investment real estate. Loans are generally for five units or more dwellings and are categorized as apartment buildings or multi-family housing. Before securing financing for multifamily loans, lenders would like to know your experience as a rental owner and/or manager. They want to make sure you have experience owning, managing, collecting rents, and handling tenants. In addition, you should have a minimum down payment of twenty-five percent (25%).

Borrowers will typically pay a loan origination fee, appraisal, title and escrow, inspections, environmental and due diligence reports. Borrowers must purchase property insurance and flood insurance may be required if the property is located in a government designated flood zone.

Who Benefits from Multifamily Investing?

Real estate investors at all levels of experience can benefit from multifamily real estate investment. The first-time investor can begin to build a solid, well-performing portfolio, while the experienced professional can use this kind of investment to enhance cash flow.

Investment properties often require specific financing strategies. Multifamily financing rates are typically between 4.5 percent and 12 percent with terms at around 30 to 35 years.

There are four types of multifamily loans:

• Conventional Multifamily Mortgage – Traditional lenders and banks offer these permanent conforming loans. The terms are between 15 and 40 years but are restricted to two to four units. Five or more unit properties are not eligible for this type of loan. The federal government does not back these types of loans.
• Portfolio Multifamily Loan – This nonconforming loan does not have any restrictive designation for two to four units or five or more units. It is available for the purchase of a multifamily property that has two or more units. The terms for these permanent mortgages are between three and 30 years.
• Government Backed Multifamily Mortgage – As the name implies, these loans are backed by the federal government. They are sponsored by Freddie Mac, Fannie Mae and the Federal Housing Administration (FHA). There are several of these financing options, each for specific types of properties or circumstances, including two to four units as well as five or more units.
• Short-Term Multifamily Loan – This loan is a short-term, nonpermanent lending option with terms that are between six and 36 months. Bridge loans and hard money loans fall under this category, and often the monthly payments are interest only. They are typically used to increase the occupancy of an apartment building or other multifamily property, or they can be used for renovations. Although they can be used to purchase property and then refinanced when the personal qualifications are met.

What do Financial Lenders look for?

Lenders will require bank statements, personal tax returns, business tax returns, business registration or entity documents, rent rolls, Net Operating Income (NOI, annual income, minus expenses that the property generates from its operations), a minimum Debt Service Ratio (cash flow relative to debt payment obligations) of 1.25 (a DSR of 1means that there is equal amounts of funds coming and going out.

If you have a number greater than 1 e.g. 1.5, that means that you have positive cash flow. A number below 1 would mean you have negative cash flow). Calculating your DSR is as follows: DSR= Net operating income (NOI) / Principal and interest payments. A Loan To Value (amount of the loan relative to the value of the property) is less than 75%.

Understanding the Lending Process

First-time borrowers are often a little shocked the first time they apply for a multifamily loan, especially if they have gotten a mortgage for their own home. They do not expect the rigorous application process and are often taken aback at first. The truth is, lenders do look for more information when approving multifamily or apartment loans. The lender needs to be able to evaluate the property to determine if it is a sound investment. This means more steps and more information that must pass through their hands. They look at much more than a credit score…

• Past and present cash flow – The lender needs to know that the property is able to generate income that is sufficient for meeting the monthly debt service payments. For apartment loans, they will review that current rent roll, which is a detailed analysis of the current tenants, including the amount they pay in rent, dates of least termination and net operating income (NOI).
• Financial situation of the borrower – There are several things that lenders look for in regard to the borrower’s finances:
  • Available liquid capital (cash on hand) that can cover a minimum 20 percent down payment (often more) as well as enough cash to cover six to nine months of payments on the mortgage.
  • Personal credit score of the borrower – This should be a minimum of 680. Anything lower can create doubt that the loan will be repaid.
  • Explanations of adverse credit actions – Liens, foreclosures, judgments and short sales as well as collection accounts will need to be corrected or explained so that the lender is satisfied.
• Property condition – The lender will want to evaluate not only the property but the surrounding area as well. Circumstances in the area around the property such as economic decline, increased crime or decrease in population can affect the property’s income ability and potential. The conditions will need to be weighed against the property’s function to determine if it can sustain financially in the environment.

It is the lender’s job to look at properties and determine whether or not they will increase in value and have the ability to sustain a consistent cash flow. The lender must assess the borrower’s financial health to determine if it is good enough to weather the stress and challenge of a loan for investment real estate.

Borrower Best Practices:

Multifamily or apartment financing is very different from other real estate loans. This is essentially a business loan, and the lender will look at it as such. They need to ensure that the business is viable and the property is appropriate for sustaining it. These best practices by top financial experts help increase a borrower’s chances of getting the loan they want:

• Lenders like to see that you have a net worth that is equal to or exceeding the loan amount. If you do not meet these requirements, team with another individual or entity that does.
• Talk to multiple lenders, secure your financing before another individual/entity purchases your desired property.
• ower LTV = lower rate, typically <≡ 75% is preferred
• Check your monthly payments with our Business Loan calculator.
• Keep impeccable financial records. Document earnings as well as losses and debt. Track the resolution of negative financial information to clearly show how issues were resolved and record all income, including where it came from and other relevant details.
• Do not approach a lender without liquid capital. Conservative recommendations hover around 20 percent of the purchase price for a down payment but aim for 35 percent for extra cushion. Additionally, have at least six months of mortgage payments, but nine months of payments is better.
• Build a great credit score. This may take time if the score is below 680, but ideally, it should be higher. Address any negative information and keep very good records.

Get Started with Multifamily Apartment Loans

If you are looking for multifamily or apartment financing, start with Magilla Loans to find the right lender for your investment. Use our helpful tools like our debt-to-income calculator or mortgage calculator to learn more.