Multi-family commercial loans are a type of mortgage used to finance the purchase or refinance of a multi-family property, such as an apartment complex, office building, or retail center.
Financial institutions, government-backed organizations, and private money lenders provide these loans. If you’re considering applying for a multi-family loan, here’s what you should know about qualifying as a borrower.
What Are Multifamily Loans in Commercial Real Estate?
Generally, multifamily financing is designed for investors looking to purchase or refinance commercial properties with five or more units, such as an apartment complex or student housing.
Multi-family buildings with fewer than five units are considered residential properties instead of commercial.
Multi-family commercial loans are a type of loan that is used for the purchase or refinancing of multi-family properties. The loan can also finance the construction of new multi-family buildings.
Several types of multi-family commercial loans are available, each with its own terms and conditions, including conventional and government-backed loans.
What Are the Different Types of Multi-Family Loans?
From conventional to government-sponsored loans, a few different types of loans can be used for multi-family properties.
Conventional loans are the most common, carrying either fixed or adjustable terms.
Fixed-rate loans offer stability throughout the life of the loan, while adjustable-rate loans may have lower initial payments but can increase over time. These commercial mortgage loans typically have a term of five to 30 years.
Interest rates for both conventional loans are generally lower than for commercial loans, such as private equity or bridge loans.
Lenders typically require a down payment of 20 percent or more for a conventional loan and proof of income and assets. Borrowers with solid credit histories and stable incomes are more likely to qualify for traditional financing.
Portfolio loans are typically higher risk and offer higher interest rates than other commercial loans, but they can be a good option for borrowers who don’t qualify for traditional financing.
Portfolio loans can finance the purchase or refinance of multi-family properties, including apartments, condos, and mixed-use buildings. They can also be used for construction and rehabilitation projects.
Bank portfolio loans typically have higher interest rates than other commercial loans because they’re considered higher risk. However, they can still offer competitive rates if you compare them to different types of alternative financings, such as private money loans.
Governmental agencies, including the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD), could provide mortgage loans for multi-family properties.
In addition, the Freddie Mac and Fannie Mae loans are backed by government-sponsored enterprises (GSEs) that provide liquidity to the mortgage market by buying and securing loans originated by lenders.
Government-backed multi-family loans usually have low-interest rates similar to affordable housing loans and provide good terms for repayment within the amortization period, whether short-term or long-term.
Who Qualifies for a Multi-Family Commercial Loan?
The property must meet the eligibility criteria the lender sets to qualify for commercial multifamily real estate loan options.
Plus, the property — whether it’s an apartment building, a form of seniors housing, or otherwise — must be zoned for commercial use and contain at least five dwelling units.
The loan amount is potentially based on the value of the property and your ability to repay it, also known as the loan-to-value ratio.
Lenders may also consider factors such as your rental history, income, and previous experience in real estate investing when determining your loan size. If you’re a first-time borrower, this may be an essential factor in deciding whether or not you’re a good fit for a multi-family loan.
Additionally, the loan type will specify the minimum prepayment amount you must deposit.
Another critical factor in qualifying for a multi-family loan program is the amount of income you make. While some lenders will consider your income as a whole, others will also consider your DTI ratio. If you have a low DTI ratio, you can qualify for a lower down payment option.
If you own rental properties, you may be able to use your rental income to qualify for a multi-family mortgage.
Because multi-family occupancy properties present a higher risk to mortgage lenders than single-family properties with FHA loans, lenders require applicants to have a minimum amount of savings available upon closing.
This is meant to protect borrowers from unexpected financial difficulties. While many lenders have varying criteria for determining this reserve amount, the minimum amount is typically higher than what’s required for single-family home loans, construction loans, and other commercial real estate loans.
What Is the Minimum Credit Score To Qualify for a Multi-family Property Loan?
Most conventional multi-family loans have strict qualification requirements, and a credit score of 660 is often required for approval.
In addition, these loans often have higher loan limits. They may require borrowers to have appropriate reserve funds to pay for the property and a high enough debt-to-income (DTI) ratio, which compares gross monthly income to monthly debt payments.
For a government-backed apartment loan, you need a credit score of at least 580. Ultimately, the minimum credit score required for multi-family loans will vary depending on the property type.
For example, multi-family loans for properties with only five units are usually less expensive than multi-family loans with six or more units.
What Are the Pros and Cons of a Multi-Family Commercial Loan?
You may be eligible for a multi-family commercial loan if you’re a real estate investor with more than one rental property. This financing option is available to purchase or refinance investment properties with two or more units.
While multi-family loans offer several advantages, there are a few potential drawbacks.
The most significant advantage of a multi-family loan is the lower interest rate. Because these loans are commercial financing, the loan rates are usually 1 percent to 1.5 percent lower than traditional residential mortgages.
This can save you thousands of dollars over the life of the loan. Additionally, many lenders will allow you to finance up to 90 percent of the purchase price, which can help you keep your initial investment low.
Another advantage is that multifamily investments tend to have longer loan terms than traditional mortgages. This means you’ll have more time to repay the loan and build equity in your property.
Additionally, because multi-family loans are considered commercial financing, they may be eligible for certain tax breaks that aren’t available with other types of loans.
There are some potential drawbacks to consider as well. One is that multi-family loans typically have higher interest rates than single-family home loans. This means you’ll need to budget carefully to ensure your monthly payments are affordable.
Additionally, closing costs on multi-family loans can be higher than on other loans, so comparing estimates from multiple lenders is essential.
Key Takeaways About Multi-Family Commercial Loans
If you’re looking to purchase or refinance a multi-family property, the good news is that many lenders offer loans specifically for multi-family homes, and the qualifications are often similar to those for other types of commercial loans. To qualify for a multi-family loan, you’ll generally need good credit and enough income to make the payments.
Specific lenders may also want to see that you have experience owning and managing rental property, which will help them assess your risk.
The requirements for these types of loans vary from lender to lender. If you’re unsure if you qualify for a loan, your best bet is to talk to a lender about your specific situation. They can help you understand your qualifications and how to best prepare your application.