Multifamily residential real estate financing is a type of real estate financing that can be used to purchase or refinance a property that contains multiple dwelling units. The most common type of multifamily residential property is an apartment building, but this type of financing can also be used for properties such as duplexes, triplexes, and quadplexes.
If you’re looking to finance a multifamily residential property, there are a few things you need to know before you obtain a loan. In this guide, we’re going to cover conventional, FHA, VA, and USDA multifamily loans. Let’s get into the nitty-gritty details and review everything you need to know about residential multifamily real estate financing in this comprehensive guide.
Table of contents
Multifamily Loan Definition
A multifamily loan is any loan used by real estate investors to purchase or refinance smaller multi-unit properties (2-4 units) and large apartment complexes (5+ units). Interest rates and terms on multifamily loans can vary wildly, depending on the borrower’s creditworthiness, the amount of capital they’re looking to borrow, the quality of the property itself, the lender, and the loan program chosen by the borrower.
Multifamily Loans Explained
Multifamily loans are a type of mortgage loan used to finance the purchase or refinance of a multifamily property, like an apartment building. Multifamily loans are available from a variety of lenders, including banks, credit unions, and private lenders. Multifamily loans are typically used by investors who own or want to purchase multifamily properties. These loans can be used for numerous purposes, including purchasing a new property, refinancing an existing loan, or making repairs and improvements to an existing property.
These loans typically have higher interest rates than other types of loans, such as single-family home loans. However, they often offer more flexible terms and lower down payment requirements. Multifamily loans are available in various loan programs, including conventional loans, FHA loans, VA loans, and USDA loans. Understanding the fundamentals behind multifamily loans, including industry terminology, is essential to making the right investment decisions for your financial future.
How Do Multifamily Loans Work?
Homeowners, investors, and developers use multifamily loans to acquire new properties, develop a project from scratch, or refinance an existing multifamily property. Loans are available for a wide range of properties, including duplexes, townhomes, small apartment buildings, all the way up to large apartment complexes and high-rise buildings. If a building has four household units or less, it qualifies for residential loans. Any property built for more than four households is considered a commercial property and will require a commercial loan.
Conventional vs. Commercial Multifamily Loan
There are a few key differences between conventional and commercial multifamily loans. For one, commercial multifamily loans tend to be for larger properties with more units, while conventional loans are more often for smaller multifamily homes. Commercial multifamily loans typically have higher interest rates and down payment requirements than conventional loans. Finally, commercial loans are usually non-recourse, meaning that the lender cannot go after the borrower personally if the loan defaults, while conventional loans are often recourse loans.
Multifamily Loan Types
There are many different types of multifamily loans, each with their own unique terms and conditions. The most common types of multifamily loans are:
Conventional Multifamily Loans
A conventional multifamily loan is a mortgage used to finance the purchase or refinance of a multifamily property. Conventional multifamily loans are available from a variety of lenders, including banks, credit unions, and private lenders. The terms of a conventional multifamily loan are typically five to thirty years, with a fixed or variable interest rate.
The loan amount is usually 80% of the purchase price or appraised value of the property, whichever is less. Conventional multifamily loans can be used to purchase or refinance properties with two to four units. They are typically used by investors who plan to hold the property for five years or more. In order to qualify for a conventional multifamily loan, you will need:
- A 620 (or higher) Credit Score
- Debt-to-income ratio below 50%
- A down payment; this will vary depending on the total number of units and whether or not the property is your primary residence.
Conventional Multifamily Loan Advantages
There are many reasons to use a conventional multifamily loan rather than another type of loan. Conventional multifamily loans are typically cheaper than other types of loans, have more flexible terms, and are more widely available than other types of loans.
Lower Interest Rates – Conventional loans typically offer the best rates for longer-term real estate financing. Investment loans tend to sit about a half to a full point higher than owner-occupied. This allows you to borrow at relatively low rates, even though we’re experiencing a rapid rise in commercial and residential real estate loans. Lower interest rates keep your monthly payment low and leave you room to scale your portfolio by keeping your DTI ratio low.
Longer Terms – Conventional lenders offer long terms, with most offering terms as long as 30 years and even 40 years in certain niche circumstances. Like lower interest rates, a longer term can help keep your monthly payment low- freeing up valuable capital you can leverage to acquire more RE assets or other investments.
They’re Professionally Oriented
Professionally Oriented – Conventional lenders eat, sleep, and breathe multifamily loans. In most cases, your loan officer or broker will have a wealth of experience shepherding loans from start to finish. It’s a much more defined and systematic process than something like a relationship-based loan.
Disadvantages of Buying Multifamily Properties With Conventional Loans
Every rose has its thorns, and despite its numerous benefits, conventional multifamily loans are not always the perfect loan option for all investors.
Maximum Number of Loans (Capped at 10 by Fannie Mae) – Investors have a hard cap on the number of conventional loans they can utilize. The current limit, set by Fannie Mae, is 10 loans. However, due to strict adherence to DTI ratios, many investors may not even be able to get approved for all 10 loans. The more loans you have, the higher the likelihood that you’ll fall out of the acceptable range for approval from a conventional lender.
Not Great for Investors That Use LLCs or Corporations – Conventional multifamily lenders often shy away from extending loans to corporations or LLCs. This reticence is magnified when it comes to residential loans. If you’re using an LLC or corporation to reduce your exposure and keep your name separate from the property you might have trouble finding a conventional loan that meets your needs.
Multifamily Conventional Loan Pros and Cons
|Conventional Multifamily Loan Pros||Conventional Multifamily Loan Cons|
|Low Interest Rates||Max 10 Loans|
|Long Terms (potential lower monthly payments)||Loan Verification and Underwriting Can Be Slow|
|Standard Residential Loans||Property Condition Plays a Huge Role (you may have issues finding acceptable loans for rehab-ready properties)|
|A Variety of Lenders to Choose From||May Have Issues Borrowing Through a Corporate Entity|
FHA Multifamily Loans
FHA multifamily loans are a type of financing backed by the FHA, or Federal Housing Administration. These loans are available for purchasing or refinancing multifamily properties, such as apartment complexes or senior housing facilities. Properties with 5 units or more are considered to be multifamily by the FHA.
They offer several advantages over other types of financing, including low down payment requirements, flexible underwriting guidelines, and competitive interest rates. Additionally, FHA loans are assumable, which means that if you sell your property, the buyer can take over your loan and continue to make the same low monthly payments.
The most significant advantage of FHA multifamily financing is that it is available for properties with as few as five units. This makes it an ideal financing option for small investors who are looking to purchase their first multifamily property.
Another advantage of FHA multifamily loans is that they can be used to finance the purchase of a property that needs significant renovations. This type of financing can be challenging to obtain from traditional lenders, but the FHA’s flexible guidelines make it possible.
If you are considering purchasing a multifamily property, FHA financing should be at the top of your list. These loans offer many benefits and can help you get into your dream property with less money down. In order to qualify for an FHA multifamily loan, you will need:
- A 580+ credit score
- Enough income to satisfy repayment requirements
- A housing expense ratio no higher than 38% and an overall DTI that is 45% or lower
- If you have a credit score of 620 or better, FHA may approve you with a back-end DTI that is as high as 67%- but this approval would be based on other qualifying factors as well
- An appraisal to determine a property’s value and to ensure it is habitable
Multifamily FHA Loan Advantages
There are several major benefits offered by FHA multifamily loans, when compared to other types of multifamily loans:
- You only need a 3.5% down payment.
- Low interest rates due to FHA guaranteeing the loan
- Easier underwriting as well as manual underwriting options
- Can wrap a renovation loan into a mortgage loan to make one easy payment
Multifamily FHA Loan Disadvantages
Like any other type of multifamily loans, FHA loans do have some disadvantages.
- The property needs to be owner-occupied, limiting your ability to scale and essentially forcing you to live onsite.
- MIP (Mortgage Insurance Premiums) need to be paid upfront, and in monthly installments, for 11 years- regardless of how much equity you have. If your equity amount or down payment is less than 10% when you close on the loan, you’ll pay MIP for the entire life of the mortgage.
- FHA appraisals are relatively strict due to the government backing the loan. This may cause sellers to not value an FHA approval as highly as other loan guarantees.
- There are lower interest rates out there.
Multifamily FHA Loan Pros and Cons
|Multifamily FHA Loan Pros||Multifamily FHA Loan Cons|
|Only need 3.5% down payment||Needs to be owner-occupied|
|Low interest rates||MIP (Mortgage Insurance Premiums) need to be paid upfront and in monthly installments. You also have to pay MIP for the entire life of the loan if your equity/down payment is less than 10% when you get the loan.|
|Easier underwriting||FHA appraisals are strict and harder to pass than several other financing options. This means property sellers may be less likely to accept an offer based on an FHA pre-approval.|
|Can wrap renovation loans into a mortgage loan.||You can find lower interest rates, particularly when facing stricter credit underwriting standards.|
VA Multifamily Loans
A VA multifamily loan is a mortgage loan that is backed by the U.S. Department of Veterans Affairs (VA) and is available to eligible veterans, service members, and their spouses. These loans are available for the purchase or refinance of multifamily properties, such as apartments, duplexes, triplexes, and four-plexes. VA multifamily loans offer several benefits, including low-interest rates, no down payment, and no monthly mortgage insurance.
VA Multifamily Loan Advantages
There are several major benefits offered by multifamily VA loans:
- You don’t need a down payment. – Veterans with enough VA entitlement can purchase multifamily homes without a down payment. That’s a substantial advantage over FHA loans (3.5% down payment) or conventional loans (up to 25% down required).
- You don’t need to pay for mortgage insurance. – You don’t need to carry mortgage insurance with a VA loan. Borrowers who utilize FHA or conventional mortgages often require mortgage insurance so that lenders can recoup their money in the event of loan default.
- Two or more qualified veterans can purchase up to a seven-unit property together. – The VA offers a “joint loan” option that allows 2+ veterans to buy a multifamily property with as many as 7 units.
Multifamily VA Loan Pros and Cons
|Multifamily VA Loan Pros||Multifamily VA Loan Cons|
|No down payment required.||If you’re using rental income, you need past landlord experience in order to qualify.|
|You don’t need mortgage insurance.||You have to have extra cash on hand to fulfill mortgage reserve requirements.|
|You can buy up to 7 units.||You will have to live in one of the units as your personal private residence.|
|You can use rental income to qualify.||The home has to meet very strict VA appraisal standards.|
How to Buy a Multifamily Property With a VA Loan
There are several requirements one must meet before securing a VA multifamily loan.
- Borrowers need to meet basic military service requirements required to get a VA mortgage.
- They also need to qualify with a high enough credit score, income, and the right debt-to-income ratio, one’s debt should not exceed 41% of their income level. VA lenders generally prefer a credit score of at least 620.
- The borrower should have enough extra cash to pay for 6 months (or more) of mortgage payments for the multifamily property in question.
- The veteran obtaining the VA loan must plan to move into one of the properties within 60 days of the closing date, and they must also remain there for 12 months at the very least.
USDA Multifamily Loans
The USDA (United Stated Department of Agriculture) is a Government program that provides affordable loans to build housing for low and moderate income families in rural areas. The program offers a few different types of multifamily loan programs, each with its own set of benefits and requirements.
USDA Multifamily Housing Direct Loan Program
The USDA Multifamily Housing Direct Loan Program was designed to help qualified borrowers increase the affordable rental supply in middle and low-income regions. These loans are given to state and local governments, federally-recognize tribes, non-profits, LLCs, and other for-profit organizations. In order to be eligible for these loans, you must pass the following eligibility requirements:
- Individual unit rent needs to be capped at 30% of 115% of the median income in the area
- The average rent for the project can’t exceed more than 30% of the area’s median income
- The property needs to have five units or more
- The property needs to sit in a “qualified rural area” as designated by the USDA
Read on for an in-depth look at each of these programs:
Section 538 – The Section 538 program is the most popular of the USDA multifamily loan programs. It is available to for-profit and nonprofit organizations, as well as state and local governments. The program requires that at least 20% of the units in a project be occupied by tenants with incomes at or below 60% of the area median income.
Section 542 – The Section 542 program is available to for-profit and nonprofit organizations, as well as state and local governments. The program provides direct loans for the construction or rehabilitation of rural rental housing. The program requires that at least 20% of the units in a project be occupied by tenants with incomes at or below 60% of the area median income.
Section 515 – The Section 515 program is the oldest of the USDA multifamily loan programs. It provides direct and guaranteed loans for the construction, purchase, or rehabilitation of rural multifamily housing projects. The program requires that at least 20% of the units in a project be occupied by tenants with incomes at or below 60% of the area median income.
Multifamily Loan & Borrower Requirements
Multifamily loan and borrower requirements differ significantly from those you might face with a traditional residential mortgage. They typically have stricter eligibility requirements than other types of real estate loans. This is because they are often considered to be a higher risk by lenders. To qualify for a multifamily loan, borrowers typically need a strong credit history and a down payment of at least 20%. They also need to demonstrate their ability to manage a property and generate income from it.
Multifamily loans are typically repaid over a period of 15 to 30 years. Interest rates on these loans are usually higher than other commercial real estate loans. This is because of the higher risk involved. If you are thinking of financing the purchase or refinance of a multifamily property, it is important to compare different lenders and their terms before proceeding. Be sure to shop around for the best deal and compare the interest rates, fees, and other terms of the loan.
Borrower and loan requirements will differ from loan type to loan type and lender to lender, but you can use this chart to get a general sense of lender and borrower requirements for the various types of residential multifamily real estate financing options.
|Type of Loan||Conventional||FHA||VA||USDA|
|Benefits||Flexible loan terms|
|3.5% down payment|
Low interest rates
|No down payment|
No mortgage insurance
Low Interest Rates
|Low interest rates|
Can be used for rehab and reno projects
|Eligibility||Stabilized, existing, conventional properties|
Creditworthy, single-asset, U.S. borrower with U.S. ownership
Open to indirect foreign ownership interests dependent on structure
Up to 4 units
Income, credit, and DTI requirements
Rental income can be used to qualify
|Must be a veteran|
Joint ownership program that allows up to 7 units
VA Funding Fee
VA Appraisal Standards
|Property needs to be in a USDA designated area|
Meets income and credit requirements
USDA Appraisal Standards
|Term||5-30 years||5-35 years||5-30 years||5-30 years|
|Interest Rate||Fixed and variable rate||Fixed||Fixed||Fixed and variable rate|
What to Look For in a Multifamily Lender
When you’re in the market for a multifamily lender, there are a few key things to keep in mind. First and foremost, you want to find a lender who is experienced in the multifamily lending space. This means they should have a good understanding of the different types of loans available and be able to work with you to find the best fit for your needs.
5 Questions to Ask Your Lender
When you’re ready to buy a home, it’s important to find a lender that’s a good fit. Let’s look at five questions you need to ask your potential lender before you make a decision.
- What are your interest rates and terms? – Make sure you understand the interest rate and terms of your loan before you sign anything. Ask about the APR (Annual Percentage Rate), which includes fees and costs associated with the loan.
- How much will I need to put down? – Some loans require a larger down payment than others. Ask your prospective lender how much you’ll need to put down on the home to get the loan you want.
- What are your fees? – Lenders charge fees for their services. Ask your lender what fees you’ll be responsible for, such as an application fee, origination fee, or closing costs.
- How long will it take to get my loan? – The time it takes to get a loan varies from lender to lender. Ask the lender how long the process will take from start to finish.
- Do you need to sign in person or do they accept e-signatures/mailed docs? – Eventually, you’ll need to sign on the dotted line. Ask if the lender has e-signature/mailed docs available as an option for closing. In fact, you’re going to want to work with a lender that has all their digital ducks in a row- it will make the process much easier, particularly if you’re looking at a multifamily property that’s outside of your immediate geographic location.