How to Qualify for a Multifamily Loan in 2021
**The information on this web page is provided for informational purposes only and should not be considered as legal, tax, financial or investment advice. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions.**
In this article I’m going to show you how to qualify for a multifamily loan and what your options are.
As a real estate lender, I’m often asked about the various options available for multifamily financing, often by real estate investors who haven’t yet entered this part of the market. Therefore, I’m sharing my industry knowledge in this article and will talk you through the following:
- The kind of loan you can get for apartment building financing
- Their pros and cons
- What are hard money loans
Let’s get into it.
What Kind of Loan Can I Get for Apartment Building Financing?
There are a variety of loans you can obtain for financing multifamily properties, so I’ve broken them down into three distinct categories. When asking “how to qualify for a multifamily loan?” it’s necessary first to consider each option and their qualifying terms.
- Government-backed apartment loan
- Bank balance apartment loan
- Hard money loan
In the sections below, I’m going to cover what the qualifying terms for these multifamily financing options are and I’ll throw in some useful tips for expediting the approval process.
Let’s start with the government-backed apartment loan.
1. Government-Backed Multifamily Loan
Government-backed apartment loans are also known as the HUD (US Department of Housing or Urban Development) or FHA (Federal Housing Association) loans.
They’re issued to real-estate investors looking to build multifamily properties of up to four units, and are 100% insured by the government in the case of default. These types of multifamily loans typically range from approximately $400,000 to $1,500,000 and are issued specifically for multifamily developers that want to build market-rate property.
How Do Government-Backed Multifamily Loans Work?
A government-backed apartment loan lasts between 35 to 40 years with fixed-rate amortization. These terms are not subject to changes in market conditions.
Notably, the process of applying and being approved for a government-backed apartment loan lasts between 5 to 10 months, and depends mainly on whether the property is already stabilized or in construction.
Additionally, there’s also a non-refundable fee of 0.3% of the mortgage value for the application, and a minimum down payment of 3.5% of the mortgage value if the application is successful.
Pros of Government-Backed Multifamily Loans
- Favorable rates: Government-backed loans offer great terms to successful applications. On top of being a 35 to 40 year loan and amortization, these loans are typically non-recourse at up to 80% of the loan value, meaning the lender can’t repossess your personal assets if you can’t make payment on the debt.
- Can be used for affordable and premium housing: The common misconception about government-backed apartment loans is that they’re issued specifically for affordable housing projects. This is not the case. Many Class A buildings can qualify for these types of loans.
- Can be combined with local tax credits: Combining government-backed apartment loans with local benefits like municipal grants make them lucrative instruments for multifamily financing.
Cons of Government-Backed Multifamily Loans
- Dependent on the interest rate at the point of issue: In the current economic climate, this would be considered a positive. Should interest rates rise to much higher levels in the future, however, the government-backed apartment loan would become a less attractive multifamily loan option. This is the nature of any fixed-rate financial instrument.
- Low balance limits: The government-backed apartment loans have a ceiling just shy of $1,500,000, making them less suitable for bigger property construction projects.
- You have to live in the property: If your government-backed apartment loan application is approved, you’re required to live within the property complex for at least 12 months.
How Do You Qualify for a Government-Backed Multifamily Loan?
To qualify for a government-backed apartment loan, you must work with an FHA-licensed lender to underwrite the loan. Commercial mortgage brokers will help you find one according to your project.
To qualify for a government-backed apartment loan with only a 3.5% down payment, your credit score must be 580 or higher. To qualify for the loan with a 10% down payment, your credit score can be between 500 to 579.
Concerning outstanding debts, you must be clear of the government CAIVRS (Credit Alert Interactive Reporting System) database to be eligible.
Depending on the type of government multifamily loan you apply for – be it two-unit, three-unit or four-unit properties – you’ll need to show documentation about your personal finances. As well as your tax returns, pay slips and W-2s, you may need to show you have sufficient financial reserves, especially if your multifamily loan is for three-unit or four-unit housing.
2. Bank Balance Apartment Loan
A bank balance apartment loan is also known as conventional mortgage loan.
It is typically issued, as the name suggests, by commercial banks or lending institutions and is between 15 to 30 years in loan length. A bank balance apartment loan is issued for multifamily properties between two to four units, and ranges between $600,000 to $1,400,000 in value.
How Do Bank Balance Apartment Loans Work?
A bank balance apartment loan lasts for up to 30 years and can be at a fixed or variable rate of interest. Fixed-rate multifamily loans from commercial banks have complete amortization for the duration of the loan, while variable-rate loans are amortized for the first seven to 10 years.
Bank-issued, variable-rate multifamily loans have their interest rates set by the LIBOR (Intercontinental Exchange London Interbank Offered Rate) and are capped at the live rate plus a proportional 5% to 6%.
In addition, there’s a non-refundable application and appraisal fee of around $600 to $700 and a closing cost total that can cost up to 5% of the total loan.
Pros of Bank Balance Apartment Loans
- Issued quicker than a government-backed apartment loan: Unlike when dealing with HUD or the FHA for a multifamily loan, a bank balance apartment loan can be approved within 30 to 45 days.
- Smaller application fee: A multifamily loan through a bank costs significantly less in application fees, meaning that failure to see your loan approved won’t break the bank.
Cons of Bank Balance Apartment Loans
- High Credit Score Requirements: Most bank balance apartment loans will require you to have a credit score in excess of around 680, which is considerably higher than the government issued multifamily loan alternative.
- High minimum down payment: Due to the high risk incurred by the bank, a multifamily loan of this nature means a 20% minimum down payment must be met.
How Do You Qualify for a Bank Balance Apartment Loan?
Qualifying for a bank balance apartment loan requires you to have healthy cash reserves, a high credit score and evidence of rent rolls. For personal finances, you’ll need to show two years of tax returns.
Generally speaking, banks will look for your DSCR (Minimum Debt Service Cover Ratio) to be 1.25 or higher. DSCR means Net Operating Income divided by Total Debt Service (more details on how to calculate it).
These loans are conforming, meaning that they meet Fannie Mae and Freddie Mac’s terms and conditions on loan limits, making them highly competitive.
3. Hard Money Loans
Hard money loans are also known as short-term bridge loans.
They’re issued based on risk, making the loan deal better for more financially stable borrowers. Hard money loans are effectively bridges, meaning that interest rates are higher but the loan approval process is significantly more streamlined.
Similar to bank and government-issued multifamily loans, hard money loans range between $600,000 to $1,400,000 in value, yet the maximum loan amount depends on the borrower’s experience and the lender’s risk tolerance.
You can also meet the term “private money” applied to these loans as a synonym. However, it’s not the same. As explained by We Lend LLC, Private money is lent by a private person or organization. Therefore, the terms can vary greatly from lender to lender. Private lenders can use whatever criteria they are comfortable with when deciding whether or not to lend to a person or entity.
Private money is a loan you can get from your friends, family members, or acquaintances on any terms you agree to. Hard money is a loan from a lender that specializes particularly in hard money lending.
How Do Multifamily Hard Money Loans Work?
Hard money loans are built to be transitional, so that the borrower acquires investment quickly to see them through renovation, improvement or extensions to existing properties. With the right lender, multifamily loans like these can be issued within 10 days of application.
While hard money loans have higher variable rates of interest than other multifamily loans, their credit score requirements are generally lower and usually don’t contain prepayment penalties, giving incentive to pay off the loan quickly. Hard money loans are much shorter than government or bank-issued multifamily loans, generally lasting between 6 to 36 months.
Pros of Multifamily Hard Money Loans
- Quick loan approval: The nature of hard money loans means that the application and approval process is considerably faster than both government and bank-issued multifamily loans.
- Low minimum credit score requirements: Given that interest rates are higher to mitigate lender risk, your personal credit score for a hard money loan only needs to be around 650 or higher.
- Low DSCR requirement: Lender DSCR requirements for hard money loans are generally lower than bank balance apartment loans – around 1.05. This means your required capital to offset the value of the loan is lower than a bank’s prerequisite.
- Low minimum down payment: Minimum down payment on this type of multifamily loan is around half of a bank’s – 10%.
Cons of Multifamily Hard Money Loans
- Investor experience needed: Many hard money lenders will ask for your property investor experience. If you’ve worked in at least two home renovation projects or have worked for two years in property investing (preferably investing in commercial real estate), you should be fine.
- Interest rates can be higher: Interest rates on hard money loans can range from 8% to 12%. You can reduce the consequences of this, however, with prudent prepayment.
How Do You Qualify for a Multifamily Hard Money Loan?
If you have a credit score of around 550 and above, you should be eligible for a hard money loan. Your experience in property renovation, restoration and investment will contribute to the quality and quantity of a hard money loan that you’re offered.
As well as the above, your personal finances and assets are important factors in the success or failure of your application for a hard money loan. While the LTV (loan-to-value) ratio is substantial with this kind of multifamily loan (around 90%) the LTC (loan-to-cost) ratio is also high (around 75%).
This means that if the project you’re using the hard money loan for exceeds its budget, you’ll have to put in more of your own cash to keep it going. Lenders will pay close attention to this before deciding whether or not to approve the loan.
How to Get the Best Rate for a Hard Money Loan?
It’s not only important to qualify for a hard money loan, but also to get one at the best possible rate. You need to compare different options available in your location and then choose a reputable lender offering the best terms for your project.
To save yourself time for research, consider getting a few quotes at once by requesting them through PropertyCashin. As an all-in-one platform for commercial real estate investors, we have relationships with top-rated hard money lenders throughout the USA.
Fill out this form to get up to 5 quotes from the top-rated lenders working in your location and willing to help you finance your lucrative project.
The Bottom Line
Multifamily loans come in all shapes and sizes. The purpose of these loans is to give inspiring property developers the chance to build their own portfolio of houses, apartments or condominiums. Moreover, the borrower is about to leverage their own cash while reducing the risk one single entity or developer takes on.
Given the variety of financing options, it’s crucial you choose the type of multifamily loan that suits your needs. Before making any significant decisions, it’s always best to consult with an experienced real estate investor or agency, who are accustomed to the nuts and bolts of these different forms of financing.