Investors focused on real estate investing, particularly apartment or multifamily property, will eventually need to secure a loan. Understanding how commercial multifamily loans work before an offer is accepted will help make the loan application and loan process much easier. Learn how multifamily financing works, the different types of financing options available, and what the loan process is like.
What is a commercial multifamily loan?
Commercial multifamily loans can be short-term or long-term loans for the development, purchase, or even rehabilitation of multifamily real estate with five units or more. Loans typically start around $500,000 ranging all the way to tens of millions of dollars. Interest rates, term rates, loan limits, and down payment requirements will all vary depending on the specific financing program.
Commercial multifamily loan programs
There are several types of multifamily mortgage loan programs targeted specifically for multifamily investors, but they're typically split into three categories:
- Government-backed loans
- Conventional loans
- Private loans
Government-backed loans are loans issued through or backed by the Federal Housing Agency (FHA) and government sponsored entity (GSE) Fannie Mae.
Fannie Mae has a multitude of financing programs available, which include long-term financing for stabilized properties. This is by far their most popular program for established multifamily property because of the favorable 30-year term and high 80% loan-to-value limit. They also offer shorter-term financing programs including an adjustable 5-year or 7-year loan, bridge loans, mixed-use multifamily loans that have alternative uses including retail, office, or public parking spaces, and subordinate modification or rehab loans that can accompany other loan programs.
Government-backed loans have major benefits over other multifamily loan programs, the largest of which is that they are nonrecourse, meaning the lender cannot personally take recourse on other assets owned by the borrower beyond the collateralized property in the event of default. They also offer competitive rates, which can be fixed or variable, for a long term. However, minimum loan amounts start at $750,000 and are typically offered only for existing properties, meaning they aren't ideal for new developments.
A conventional mortgage is a loan provided by traditional lending institutions, which could include a bank, credit union, or non-bank lender. Conventional loans are great for investors who are purchasing a lower-valued property with loans starting as low $500,000. Term length will vary depending on the lender and conventional program, which can be a shorter term limit, such as 5 to 10 years, or a longer term of up to 30. Conventional loans may have higher interest rates than a government loan, which can be fixed or variable. Most conventional loans are recourse and require 20% down or more. The major pro to choosing a conventional loan program is that they offer construction financing for new developments and lower loan amounts.
Private loans are loans issued in the private sector, which could include loans from a family member, friend, or established private lending company. Private lenders typically offer short-term loans such as a hard money loan that can last from one year to several years with high interest rates. Private loans are great for properties that don't qualify for conventional financing or government loan programs, and they allow the investor to improve the property, establish a rental history, then seek permanent financing once improved.
Just as the loan terms vary, the loan process and requirements may change depending on the program being applied for. It's helpful to have someone guide you through the process and help you prepare your paperwork, which can be extensive. This could be a representative of the bank, such as a loan officer, or you can hire a third-party mortgage broker for a fee. Lenders in any capacity will typically require the following:
- Applicant information including name and ownership percentages for key owners (anyone with 15% or more ownership in the owning entity)
- Resumes and background information for applicants
- Executed purchase contract for the property
- A property or project summary, such as a business plan or executive summary
- Scope of work for the project, including budget or quotes for renovations, equipment, or construction
- Income verification with bank statements or W2s (typically year-to-date)
- Three years of personal and business tax returns for all applicants
- Documentation of down payment sources
- Projected business revenues and profits for the next one to three years
- A personal financial statement, including personal and business debt
- The last two to three years of financial statements in the form of a profit and loss document and balance sheet
- The property's rent roll (if the property produces income)
- A blueprint or architectural designs of new builds or construction projects
- The name and contact information of the architect or general contractor overseeing the renovations or construction
The loan will be sent to a loan underwriter who will review all of this information. The lenders will look at the property's financials, including the property's debt-to-service coverage ratio and estimated current and projected value as well as the individual's experience, net worth, and debt-to-income to ultimately determine if the loan will be approved and at what terms if so.
The entire loan process, from application to disbursement of funds, can take four to eight weeks on average but largely depends on how quickly the applicant is able to provide the required documents to the underwriting team for review. Depending on the program, there may be ongoing monitoring to ensure the loan proceeds are being allocated appropriately to the project. This is particularly common for construction or rehab loans.
Multifamily loans in summary
Multifamily loans are one of the easiest commercial loans to seek financing for because of the vast number of programs available to borrowers. Certain projects, such as affordable housing, can receive more favorable terms or programs, but ultimately getting financing approved depends on the individual project and investor. It's a good idea to shop around and know what program will meet your specific investment needs before applying.