Multifamily Loans – Understanding Rates, Terms, and Qualifications


A number of real estate investors use loans to purchase or refinance properties. From smaller multiunit properties to larger apartment buildings, a multifamily loan can be availed to finance the buying or refurbishing. Ideal for first-time investors and seasoned buyers, the interest rate of this loan may range between 4.5 to 12 percent with a 35-year tenure.

What is a Multifamily Loan?

A multifamily loan, sometimes referred to as commercial mortgage-backed securities (CMBS) is a non-recourse loan that is used to purchase an apartment complex. Known as an apartment loan in common parlance, this commercial real estate loan is secured by the property bought by the borrower.

Where Can Multifamily Loans Be Used

A prospective borrower can avail CMBS loan for two types of properties – residential investment property or apartment building. The former should have two to four units, while the latter five or more units. It is essential to declare the nature of a property when applying for financing because the number of units determines the amount and type of multifamily loan.

Residential income properties that have two to four units can be financed by conventional mortgages. On the other hand, apartment buildings and residential properties having five or more units can use government-sponsored loans or short-term financing options.

How to Apply for a Multifamily Loan

Like every loan, multifamily financing options also have their own eligibility criteria. When applying for the apartment loan, a borrower should provide all the details of the property he intends to buy. Lenders will require information on if the said property is meant for personal or commercial use.

Many lenders also ask for extensive documentation as a part of the underwriting. If the borrower is purchasing or refinancing a multiunit property, current lease agreements, property management agreements, tax bills, and insurance policy declaration pages have to submit.

If the property is a commercial one like a limited liability company (LLC) or any other entity, employer identification number (EIN), articles of incorporation, and organizational chart are a must. Financing can also be obtained for real estate investing business plans.

Here is the list of documents a borrower will be asked to furnish:
  • Income and expense statements of the last 2 years
  • Current rent roll, operating statement, utilities of the property
  • Copies of service contract such as maintenance, pest control, landscaping etc.
  • Current financial statement and real estate schedule on each guarantor
  • Purchase contract
  • Sales brochure
  • Vesting map
  • Use of funds letter
  • Photos of interior unit and building exterior (including any upgrade done to the property)

Types of Multifamily Loans and Their Terms

Depending on the requirement, financial status, and property type of the borrower, multifamily loans are categorized as under:

Fannie Mae and Freddie Mac Multifamily Loans

The Federal Housing Administration (FHA) has two enterprises – Fannie Mae and Freddie Mae, that offer government-backed multifamily financing. These mortgage lenders are approved by the government and applications can be submitted online. Borrowers having properties with two to four units or over five units can choose from one of the multifamily loan options. This financing is idea for investors who live in one unit and rent out the others.

These loans are available with variable interest rates or fully amortized fixed rates and have their own fee structure. Due to lower credit minimum, the terms of this financing option are a little lenient when compared to others. However, income documentation, credit history, and cash reserve details of the borrower have to be submitted. Depending on the loan amount and tenure, lenders insist that borrowers should have equity in the investment property and the units be leased from three to six months.

Loan Rate

Two-unit Property USD 424,800 to 980,325  
Three-unit Property USD 513,450 to 1,184,925  
Four-unit Property USD 638,100 to 1,472,550  
Loan-to-Value (LTV) Up to 80%  
Minimum Down Payment 3.5% of the loan amount  

Loan Rates & Tenure

Rate of Interest 4.125% to 7.5%
Loan Tenure 5 to 35 years
Origination Fee Up to 1% of the loan amount
Closing Fee 2% to 5% of the amount borrowed
Prepayment Penalty 1% of the loan balance
Funding Time 60 to 180 days

The FHA 223(f)’s fee structure is mentioned below:

Private Mortgage Insurance 1% of Loan Balance
Average Minimum Legal Fees USD 10,000
Loan Origination Fees Up to 3% of the loan amount
Closing Fee 2% to 5% of the amount borrowed
Prepayment Penalty 1% of the loan balance
Minimum FHA Inspection Fee 1%

The fee can be waived off. For more details, it is advisable to consult the respective department.  

Loan Requirements

Fannie Mae & Freddie Mae FHA
Minimum Units 2 Minimum Units 5
Minimum Credit Score 650 Minimum Credit Score 650
Minimum DSCR 1.25 Minimum DSCR 1.15
Minimum Occupancy Rates 85-90% Minimum Occupancy Rates 95%
Minimum Occupancy Time 3 months Minimum Occupancy Time 9 months
Minimum Cash Reserves 3 months Minimum Cash Reserves 6 months

Conventional Loan for Multifamily Properties

Traditional banks and lending institutions offer conventional mortgages for a period of 15 to 30 years. These are long-term loans that can be used to finance multifamily properties, having two and four units. This option is ideal for multiunit properties that have already been rehabbed as well as for investment property.

One of the underwriting criteria for this mortgage is to adhere to Fannie Mae’s terms regarding the maximum loan amount. As per the latest update, Fannie Mae has increased the limit to USD 510,400 for one-unit properties, for 2020.

Borrowers of this loan are required to have a good credit score, rent rolls for the property, two years of tax returns, and cash reserves. The loan has competitive interest rates, intense underwriting, and longer closing time compared to other loan portfolios.

To qualify for this loan, the property size should be under four units. Conventional mortgages do not fund renovations and rehabs.

Loan Amounts
Two-unit Property USD 620,200 to 930,300
Three-unit Property USD 749,650 to 1,124,475
Four-unit Property  USD 931,600 to 1,397,400
Maximum Loan-to-Value (LTV) 80%
Minimum Down Payment 20%
Loan Rates &Tenure
Rates 4.75% to 7.25%
Terms 15 to 30 years
Loan Origination Fees Up to 3%
Closing Costs 2% to 5% of amount borrowed
Other Fees Appraisal $500; application fee $100-$200
Funding Time  30-45 days
Loan Requirements
Number of Allowable Units 2 to 4 units
Minimum Credit Score 680
Minimum Debt Service Cover Ratio (DSCR) 1.25
Cash Reserves 6 to 12 months

Short-term Multifamily Loan

As the name suggests, short-term multifamily financing are limited duration loans with interest-only payments. Inclusive of bridge loans and hard money loans, this mortgage is ideal for investors who want to renovate or increase the occupancy of their multiunit property.

The LTV ratio of this loan depends on the property’s current market value and good condition. LTC ratio is calculated on the multiunit property’s purchase and renovation value and also if the property is in poor condition. 10% or more of a property’s purchase value or 25% or more of a property’s purchase price, including renovation costs, is covered under this loan.

Lenders mostly focus on the property’s profitability and borrower’s equity. Bridge loans can be used to cover gaps while buying or selling multiunit properties. Though they have higher interest rates and require excellent credit scores, they hardly have any prepayment penalty.

Minimum Loan Amount USD 100,000
Maximum Loan Amount Subject to lender
Four-unit Property Loan Amount USD 638,100 to 1,472,550
Loan-to-Value (LTV) Up to 90%
Loan-to-Cost (LTC) Up to 75%
Minimum Down Payment 10%

Loan Rates & Tenure

Hard Money Loan Rates 7.5% to 12% minimum
Bridge Loan Rates 5% to 12% minimum
Terms 6 to 36 months
Loan Origination Fees 1% to 3% of loan amount
Exit Fee 1% of loan balance
Prepayment Penalty 1% of loan balance
Funding Time 10 to 45 days

Loan Requirements

Minimum Units 2
Minimum Equity 20%
Minimum Credit Score 550 hard money loan, 640 bridge loan
Minimum DSCR 1.05
Investor Experience 2 to 3 past rehab projects or 3 years multifamily ownership

Portfolio Loan

A portfolio loan is a permanent mortgage and can be availed to purchase multifamily properties having a minimum of two units. Having a tenure between three and 30 years, this financing is ideal for borrowers who want to finance multiple properties at a single tie. Flexible in nature, this loan can finance up to 10 properties simultaneously. Credit unions, private lenders, and traditional banks provide portfolio loans.

Though the rates are slightly higher than conventional loans or government-backed finance, there is more flexibility with underwriting, when compared to these two. Borrowers can get higher LTVs even with low credit requirements. One of the benefits of this loan is that financers under this category, especially hard money lenders, generally focus more on the performance of the investment property rather than a borrower’s personal financial statements.

Loan Amounts

Minimum Loan Amount USD 100,000
Maximum Loan Amount Subject to lender
Four-unit Property Loan Amount USD 638,100 to 1,472,550
Loan-to-Value (LTV) Up to 97%
Minimum Down Payment 3%

Loan Rates & Tenure

Rates 5% to 6%
Terms 3 to 30 years
Loan Origination Fees  Up to 3% of loan amount
Closing Costs 2% to 5% of amount borrowed
Prepayment Penalty 1% of loan balance
Funding Time  30 to 45 days

Loan Requirements

Minimum Units 2 to 5
Minimum Credit Score 600
Minimum DSCR 1.25
Minimum Occupancy Rates 90%
Minimum Cash Reserves 9 months
Minimum Occupancy Time 3 months

Multifamily loans can be used to finance a portfolio of properties that include apartment buildings, condos, duplexes, and townhomes. Even though many multifamily finance mortgages are available, it is essential to gauge the best ways to invest money.

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