Commercial Multifamily Mortgages

Commercial Multifamily Mortgages and Loans

Real estate investors, especially the ones interested in apartments and multifamily properties, need to secure a loan at some point. In case you are such an investor, it is important that you understand how commercial multifamily mortgages work.  

This knowledge will help you make an informed decision when applying for commercial multifamily loans. After reading this post, you will know about the loan application process and anything in between. You will be able to select the right type of loan available for an apartment or multifamily real estate.  

So without further ado, let us dive right in.

What is a commercial multifamily mortgage?  

A commercial real estate is a property with 5 or more residential units. Commercial multifamily mortgages come in both short-term and long-term options. You can use these loans to purchase, develop, construct, or renovate multifamily real estate.  

Typically, you can get a multifamily mortgage of $500,000, while the maximum limit may range up to tens of millions of dollars. The loan limit, term rates, interest rate, and down payment requirements vary by the type of financing program you choose.  

What are commercial multifamily properties? 

Commercial multifamily properties belong to the real estate class. This class includes 4-plex apartments, high-rise condominiums, and smaller multifamily units of 4 to 100 units. However, multifamily buildings have a shorter lease term than other commercial properties such as retail and office.  

 

Commercial Multifamily Loan Programs 

There are 3 different types of commercial multifamily loans available for investors. These are as follows: 

Government-backed Multifamily Loans 

All loans issued or backed by the U.S. Federal Housing Agency (FHA) and Fannie Mae (a government-sponsored entity) are known as government-backed multifamily mortgages.  

Fannie Mae offers a wide array of multifamily loan programs, including long-term financing for stabilized properties. Long-term financing is one of the most popular loan programs for established multifamily properties because of its favorable 30-year term and high loan-to-value (LTV) limit of 80%.  

In contrast, the short-term loans by Fannie Mae include adjustable loans for 5 to 7-years term, bridge loans, and mixed-use multifamily mortgages used for retail offices or public parking spaces. Subordinate modification or rehab loans are other options for short-term borrowing.  

Government-backed multifamily mortgages offer several benefits over other programs available in the market. One of the top benefits is that these loans are non-recourse, meaning the lenders cannot come after your assets in case you default on the loan.  

A competitive rate is another significant benefit of commercial multifamily mortgages. You can get a long-term multifamily loan at a fixed or variable interest rate. However, the only drawback is that the minimum loan limit starts at $750,000, and these loans are available only for existing properties, not new developments.  

Conventional Multifamily Loans 

A conventional loan refers to multifamily mortgages offered by traditional lending institutions such as banks, credit unions, and alternative/non-bank lenders. If you are an investor purchasing lower-valued property and looking for a loan starting at $500,000, a conventional multifamily loan is an ideal option for you.  

The term length of a conventional multifamily loan program may vary by the lenders and range between 5 to 10 years. However, you can get a long-term conventional multifamily mortgage for up to 30 years. It is important to note that conventional multifamily loans have higher fixed or variable interest rates than government-backed loans.  

Most conventional multifamily loans will require a minimum of 20% down payment and come with recourse, unlike government-backed loans. The main benefits of a conventional loan are that you can avail construction financing options for new developments and secure a lower loan amount.  

Private Loans 

A Private multifamily loan refers to money you borrow from a family member, friend, or established private lending company. Private lenders typically offer short-term multifamily loans, known as "hard money loans." Hard money loans usually come with higher interest rates with a term of one to several years.  

You can secure a private loan for a property that does not qualify for a government-backed or conventional multifamily mortgage. The primary objective of private loans is to help investors improve a property and establish a rental history for a short time period, also known as a "bridge." Once approved and stabilized, an investor can apply for a more permanent/long-term financing option.  

 

Loan Process 

The overall prerequisites and process to apply for a commercial multifamily mortgage vary by lenders. The terms and conditions also change depending on the type of loan program you choose. Therefore, it is best to seek the guidance of someone who is an expert in the processing and documentation such loans. We at Coldesina Capital are experts in helping clients navigate the multifamily loans process and give you an idea of what to expect. That said, here are the common requirements you will have to fulfill when applying for a multifamily mortgage plan.  

  • Applicant information, including name & ownership percentages for different partners/ owners (anyone with 15% or more ownership in the owning entity) 

  • Applicants resume & background information 

  • Property executed purchase contract 

  • A project or property summary, i.e., a business plan or executive summary 

  • Scope of project, including a budget, quotes for renovations, equipment, or construction 

  • Income verification with bank statements or W2s 

  • Three years of personal & business tax returns 

  • Documentation of down payment sources 

  • Projected business revenue & 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 a profit and loss statement with balance sheet 

  • Property rent roll  

  • A blueprint or architect’s designs of a new build or construction 

  • The contact information of the architect or general contractor overseeing renovations/ construction  

 

Once you submit all the documentation, your loan request and the supporting paper will be sent to a loan underwriter at the bank for review. The lender's underwriting staff will review your property's financials, including the debt-to-service (DTS) coverage ratio. The underwriters will also calculate the estimated current and projected value of the property.  

Other factors reviewed to determine your eligibility for loan approval include your individual borrowing history, net worth, debt-to-income (DTI) ratio. The factors as mentioned above will also determine the terms and conditions the lender will offer on your commercial multifamily mortgage plan.  

That said, lending parameters vary by each bank. Therefore, what qualifies you to secure a multifamily loan at one bank may not be applicable to another. Additionally, you may get different rates, terms, and conditions from different financial institutions for the same loan amount.  

Once the lender receives your application and documentation, the entire loan process may take between 4 to 8 weeks on average. However, the duration of loan processing from the time of the application to the disbursement of funds depends on how quickly you are able to provide the required documentation for the underwriters to review.  

Loan programs such as construction and rehab multifamily loans may require ongoing communication and oversight between the borrower and the bank. This is to ensure that the proceeds of the loan have been used appropriately for the allocated project.  

Summary of Multifamily Loans 

Multifamily loans are one of the easiest to seek amongst all commercial loans. This is because wide arrays of lending institutions offer various commercial multifamily mortgages to the borrowers. In certain specialty projects such as affordable housing, borrowers can receive more favorable rates and terms.  

You must keep in mind that your experience as an investor and favorability of success for specific projects will determine the approval of your loan application. Therefore, before you apply, it is a good idea to familiarize yourself with the options available in the market and which commercial multifamily loan programs meet your specific investment needs.  

 

Commercial Multifamily Mortgages from $100k to $100M 

Traditionally, smaller commercial multifamily mortgages and apartment loans from $100K to $100M are the most underserved financial market in the United States. Although $500,000 is a large sum of money, loans under $1 million for multifamily and commercial real estate are on a low-priority list or overlooked by the banks for approval.  

This is because the underwriting human resources and other basic needs for originating a $500,000 loan will cost the lender the same amount of money as originating a $20 million loan. On top of this, commercial multifamily loan originators receive incentives by dollar volume or receive a commission for each deal they bring to the bank. Unfortunately, the work needed to process a $500,000 loan costs the same as processing a $5M loan, and the originator will get one-tenth the commission as a reward.  

 Loan Sizes $250,000 – $100 Million Program Highlights and Eligibility: 

  • Loan sizes from $100,000 and up 

  • Credit scores from 580 and up 

  • LTVs up to 80% 

  • Terms: Up to 10 years or more fixed 

  • Amortizations: up to 30 years and interest-only options 

  • Non-recourse for multifamily loans over $750K 

  • Low-documentation programs available 

  • Multifamily mortgages over $750k up to 30 years fixed 

What Should You Expect When Applying for a Small Balance Commercial or Multifamily Mortgages? 

  • 30- to 45-Day Loan Closings 

  • Certainty of Execution  

  • Aggressive Terms 

  • White-Glove Customer Service 

  • Multiple Loan Options or different arms