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What Is a Multifamily Property?

Multifamily properties are composed of several units in the same property, and include duplexes, triplexes, fourplexes and apartment buildings. They typically fall into one of two categories: Facilities with two to four units, considered residential real estate, or those with five or more units, considered commercial real estate.

The process of finding a lender for a multifamily property depends on the category. On this page, the focus is on financing commercial multifamily properties with five units or more. Interested in investing in residential properties with fewer than five units? Click here.

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Down Payment

25% or higher

Credit Score

660 minimum

Origination Fee

Typically 1% of loan amount

Common Multifamily Properties

Multifamily loans are not just for apartments. They can be used to purchase various types of properties.

Apartments

Apartment buildings are residential properties consisting of five units or more.

Senior Housing

Senior housing includes amenities such as ramps or rails to assist older tenants who may have disabilities.

Student Housing

Student housing is designed to cater to students attending colleges or universities.

Affordable Housing

Affordable housing is for tenants who meet certain income restrictions. Rents are below the market rate.

How to Get Financing for a Multifamily Property

There are a few qualifications to consider if you’re seeking financing for a multifamily property.

Down Payment

For residential properties with five units or more, you’ll typically need a down payment of at least 25 percent. Low down payment options are typically found only with owner-occupied properties with two to four units.

Credit Score

Typically, you need to have good credit to finance investment properties. You may be able to secure a multifamily loan with a credit score of 660, although lenders prefer to see credit scores of 720 or higher.

Income

Lenders typically verify at least two years’ worth of income through financial documents — most commonly W2 forms and paystubs. Lenders may allow some rental income to qualify for an investment property loan, although it may only count if the property’s tenants have signed leases.

Cash Reserves

Lenders may require a cash reserve to cover mortgage payments in case you fall short. The amount of cash on reserve would depend on several factors, including the property’s occupancy status, the number of units and the number of other financed properties the borrower owns.

Borrow Wisely Tip

Recourse vs. Nonrecourse Loans

If a borrower defaults on a recourse loan, the lender may seek to collect the difference between the proceeds of any collateral, and the remaining balance on a loan.

When a borrower defaults on a nonrecourse loan, however, the lender is not able to collect the difference between what is owed and what they can recoup through collateral.

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Types of Multifamily Financing

When it’s time to finance your multifamily property, carefully consider your options before you apply for a loan.

Government-Backed Loans

The U.S. Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), and the U.S. Department of Agriculture (USDA) back multifamily loans. The agencies offer loan programs that can be used to finance the purchase, construction, rehabilitation or refinance of multifamily properties.

There are loans for certain types of properties, such as health care facilities or mobile home parks; affordable housing or market-rate rentals. Others are for certain kinds of borrowers, such as nonprofit organizations. Some of the programs have minimum loan amounts. For instance, HUD’s 221(d)(4) program, which offers multifamily construction loans to nonprofits, requires borrowers to take out a loan of at least $2 million.

Conventional Loans

Conventional loans conform to the standards of the two government-sponsored enterprises: Fannie Mae and Freddie Mac. These loans are commonly offered by direct lenders, such as banks and credit unions, which sell the loans on the secondary market to Fannie and Freddie.

Fannie Mae and Freddie Mac offer loan programs to finance the purchase, construction or refinance of multifamily properties that are geared toward specific types of housing, such as properties designed specifically to house students or seniors.

Hard Money Loans/Private Money Lenders

Hard money lenders are typically made up of a group of private investors, while private money lenders may be single individuals willing to loan their own money. These types of loans tend to place less emphasis on the borrower’s credit score than on the value of the property being purchased. This can be beneficial if you have poor credit. The tradeoff is that these loans usually have higher interest rates and shorter terms.

Life Insurance Companies

Life insurance companies increasingly play a larger role in commercial real estate lending. Life insurance companies often offer attractive rates and loan terms, but they tend to be unwilling to compromise their standards. Typically, only borrowers with stellar credit and other favorable factors will qualify for a commercial mortgage through a life insurance company.

Commercial Mortgage-Backed Security

A commercial mortgage-backed security (CMBS) is formed when several commercial mortgages are combined into a security, and then those shares are sold to investors. By combining several kinds of loans, CMBS loans — also known as conduit loans — allow banks to issue more loans and offer investors higher yields.

Market Rate vs. Affordable Housing

Whether your multifamily property offers market-rate or affordable housing to tenants will impact the kind of financing for which you are eligible.

Market-rate housing has no rent restrictions. Affordable housing is typically available only to tenants who meet certain income restrictions, and requires landlords to offer rents below the market rate.

Many government loan programs for multifamily properties are only available to properties that offer affordable housing.

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Refinancing a Multifamily Property

Refinancing multifamily properties can reduce monthly payments. Different factors, such as your loan-to-value ratio, interest rates and credit, can help you decide if refinancing makes sense. Comparing lenders helps you get the best rate on your new mortgage.

Equity Loans/Lines for Multifamily Properties

Home equity loan options are available for multifamily properties. Comparing multifamily equity lenders can help you get the best terms on your loan.

  • Refinance cash-out. Refinance into a loan with a lower interest rate for more than the amount of your original mortgage, receiving the difference in cash.
  • Equity line of credit. Similar to a credit card, a line of credit allows you to pay down and reuse a credit line as long as the line remains open.
  • Second mortgage cash-out. Also known as an equity loan, a second mortgage cash-out gives you a lump sum that is repaid over a fixed period of time, typically 10 to 20 years.

Construction Loans for Multifamily Properties

You may be considering building a brand-new multifamily property. You’ll likely need a multifamily construction loan to make this happen. Comparing construction lenders can help you get the best rates on a multifamily construction loan.

Some government loans are popular options. The Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA) offer several loan programs that can be used to finance multifamily properties, and Fannie Mae and Freddie Mac offer loans that can be used to rehabilitate or add on to existing properties.

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