Multifamily financing is commonly used to refinance, acquire, or cover construction costs on a multiunit property. Construction costs can include repairs, renovations, and other upgrades made to land and existing buildings. Eligible properties can vary depending on the lender you choose, but usually encompass any property with more than one unit such as duplexes, triplexes, quadplexes, apartment complexes, and more.
The best type of multifamily financing will depend on your goals, needs, and circumstances. If you decide to shop rates and programs with different lenders, you’ll come across the following four main types of multifamily loans:
- Conventional multifamily loan: Best for those looking to finance 2- to 4-unit residential properties.
- Government-backed multifamily loan: Best for owner-occupied multifamily houses or apartment complexes.
- Short-term multifamily loan: Best for fix-and-flip investors.
- Portfolio multifamily loan: Best for fast funding speeds and flexible eligibility criteria.
Types of Multifamily Loans
The exact rates and terms for a multifamily loan will vary depending on the lender and type of financing program you select. However, you’ll see common trends with specific lending programs. Below are typical figures you’re likely to see for each of the four main types of multifamily financing.
Loan Type | Maximum Loan Amounts | Typical Interest Rates | Loan Terms | Our Recommended Lender |
|---|---|---|---|---|
Conventional | $2,211,060 | 6.25% to 8% | Up to 30 years | |
Government-backed | $5 million+ | 5% and up | Up to 35 years | |
Short-term | $50 million+ | 7% and up | Up to 3 years | |
Portfolio/Private | $10 million+ | 6.5% and up | Up to 30 years |
1. Conventional Multifamily Mortgages
Who Should Consider a Conventional Multifamily Mortgage
A conventional multifamily mortgage is best suited for anyone looking to purchase or refinance a residential duplex, triplex, or quadplex. Properties must be in good condition with no health or safety hazards, and it’s recommended that you have good credit and finances to qualify.
Availability for this type of financing is easy to find. That’s because government-sponsored entities, like Fannie Mae, play a large role in purchasing these loans from lenders, allowing lenders to free up funds to make additional loans to individual borrowers and investors. For this reason, many lenders abide by the qualification requirements and other criteria set forth by Fannie Mae. One of the downsides, however, is that lenders have less flexibility in making credit policy exceptions.
A conventional mortgage, like multifamily financing, is one of many different types of investment property financing loans you can choose from. If the lender you select has multiple lending programs, you should have a greater likelihood of being matched with one best suited for your needs, especially if you’re concerned about your chances of being approved.
U.S. Bank, for instance, has strict qualification requirements. However, it offers many different types of loans. Eligible borrowers can also get some of the most competitive rates available, along with flexible repayment terms. Check out its website to learn more.
Pros & Cons of Conventional Multifamily Mortgages
| PROS | CONS |
|---|---|
| Can be used for a variety of purposes, including acquisition, rehabilitation, refinancing, or construction | Can have strict qualification requirements depending on the lender |
| Can offer competitive rates and terms | Can be subject to maximum loan amounts |
| Can have plenty of lender options since it’s a popular loan type | Can require that the property be in a specific condition to be considered eligible |
2. Government-backed Multifamily Loans
Who Should Consider Government-backed Multifamily Loans
Government-backed multifamily loans can be an excellent fit for those looking to finance nonresidential properties. This is because government loans have larger maximum funding amounts compared with conventional mortgages. Additionally, these programs can be a good fit for 2- to 4-unit properties as long as you also reside in one of the units to satisfy the owner-occupancy requirement.
These loans are backed by some form of government agency. Common examples include loans issued by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), or the Department of Veterans Affairs (VA). These loans also typically offer more competitive interest rates compared with conventional loans, although funding speeds can be slower.
If you are considering this type of financing, be aware that you may have the option of either a recourse or nonrecourse loan. The type of loan you select can have major implications for you in the event of a default:
- A recourse loan could subject your other personal or business assets to repossession by your lender if you default. The upside, however, is that these loans generally have lower interest rates.
- A nonrecourse loan limits the lender to repossess only the specified collateral in your loan agreement should you default. The tradeoff here is that rates tend to be higher.
You can head over to Commercial Real Estate Company of America, a provider that lists the lowest available rates on its website, making it easy to figure out if you qualify for the best-advertised pricing.
Visit Commercial Real Estate Company of America
- Reference our guide on the FHA multifamily loan. We’ve also recognized this as one of the best apartment building financing options for complexes or properties with five or more units.
- Read our article on the best commercial real estate loan rates to better understand how other factors can impact the rate you get from a lender.
Pros & Cons of Government-backed Multifamily Loans
| PROS | CONS |
|---|---|
| Can have more favorable rates and terms due to being government-backed | Can have strict eligibility and compliance requirements to get a loan |
| Can be easier for businesses with limited resources to qualify for | Can have other requirements such as your place of residence, as you may be ineligible if you don’t plan on residing within the financed property |
| Can be used to finance a variety of investment opportunities, such as purchasing, refinancing, or construction. | Can have a lengthier closing process in comparison to other loan types |
3. Short-term Multifamily Loans
Who Should Consider Short-term Multifamily Loans
If you are a fix-and-flip investor, short-term multifamily loans can be an excellent option to consider. These loans have quick funding speeds, and many lenders also have flexible qualification requirements, making them easier to get. Therefore, it can also be a last-resort financing option for borrowers who are ineligible for other types of traditional financing.
Generally, funds are used to purchase and renovate a dilapidated property. Once completed, the property is then resold for a profit, allowing the borrower to pay off the loan quickly. Fix-and-hold investors, on the other hand, will use this type of loan to finance a property that needs repairs. Once finished, the improved property condition makes it eligible for other types of loans, at which point it is replaced with a more permanent source of financing.
Commercial bridge loans and hard money loans are common types of short-term financing. Between the two, bridge loans tend to have lower interest rates but stricter qualification requirements. Hard money loans tend to be easier to get but carry higher rates and fees. Because of their short-term nature, they’re usually more expensive than traditional financing options. However, they are generally more accessible and can bridge the gap for a variety of real estate investors.
AVANA Capital is a lender we recommend for short-term loans. It offers commercial bridge loans with terms between 12 and 36 months, as well as the flexibility to make interest-only payments. Pre-approvals can be issued in as little as three days, with closings between 10 and 30 days.
Pros & Cons of Short-term Multifamily Loans
| PROS | CONS |
|---|---|
| Can have more flexible qualification requirements in comparison to traditional financing options | Can have higher rates and fees than other multifamily loan types |
| Can offer quicker approval and funding speeds | Can be more difficult to find a participating lender that accepts your qualifications |
| Can repay the loan with an interest-only payment schedule | Is unideal for permanent financing unless the loan is refinanced |
4. Portfolio Multifamily Loans
Who Should Consider Portfolio Multifamily Loans
If you want the ultimate flexibility when it comes to qualification requirements or credit policy exceptions, a portfolio multifamily loan should be considered. This is because portfolio lenders don’t need to adhere to third-party lending guidelines as their loans are all retained in-house. As a result, lenders have the ability to create their own guidelines and issue loan approvals as they see fit.
While lenders may still review your credit and income, you’re not bound to the same qualifications required of traditional mortgages. Even if you don’t meet some of the requirements, lenders are more willing to issue policy exceptions to get you approved if you have sufficient compensating factors.
Since these loans tend to be easier to get, rates and fees can be high in return. But if you’re considering this type of financing, we recommend our partner RCN Capital. Both short- and long-term financing options are available, and you can submit a quick and easy application request through its website.
Pros & Cons of Portfolio Multifamily Loans
| PROS | CONS |
|---|---|
| Can offer more flexible qualification criteria including credit score, income, and assets | Can have higher interest rates and closing costs than other loan types |
| Can provide larger loan amounts and customizable options | Can be difficult to find a participating lender that suits your business needs |
| Can be less strict about the current condition of the financed property | Can come with more risk since they aren’t regulated the same as traditional loans |
How to Get Multifamily Financing
You should determine your investment goals when considering what type of multifamily financing is best for you. You’ll also need to understand which financing options you qualify for and can afford. With this in mind, you can find a lender to facilitate a loan and prepare accordingly.
Consider what kind of property you’d like to invest in and what your investment goals are before proceeding. Once you’ve found the loan type best suited to your goals, determine what qualifications are required to be considered eligible.
Consider these common qualification criteria:
- Credit score: Lenders will have varying credit score requirements depending on the loan type needed. That being said, some will accept scores as low as 500, whereas others may request a score of 680 or higher. The higher your score, the better the chances of approval. If your score is lower, you may want to find lenders that specifically issue loans for bad credit.
- Time in business: Some loans may have time in business requirements to demonstrate your investment experience. This is common for fix-and-flip investments, as the lender wants to mitigate the risk of default on the loan and may not lend to inexperienced investors.
- DSCR: DSCR is calculated as your net operating income divided by your current year’s obligations. It is one method to measure your company’s ability to pay its debts based on your cash flow.
- Down payment: Down payment requirements can range from 0% to as much as 25% or more. While not necessary for all multifamily loans, you’ll typically find the best rates and loan terms from providers that require a larger down payment.
Multifamily loans can be issued by a variety of lenders―including traditional banks, credit unions, online lenders, and loan brokers. Depending on the type of loan you need, here are the types of lenders commonly available:
- Banks: Banks often have a wide range of loan types. However, qualification criteria tend to be strict, with little to no flexibility for policy exceptions. In addition to lending products, you can view our list of the best banks for real estate investors for additional services like expense management systems and rent collection.
- Credit unions: Credit unions are not-for-profit organizations that can offer more competitive rates than banks. Depending on the credit union, you could also get more flexibility with regard to eligibility criteria. One downside, though, is that this type of lender may not have as many products as that of a bank. Our roundup of the top credit unions for small businesses may be a good place to start.
- Online lenders: This type of provider can offer some of the most competitive pricing. This is partly because it has fewer expenses for things like lease payments for physical branch locations. In exchange for lower rates, you’ll need to be comfortable conducting business primarily online. Check out our list of the best commercial real estate loans for some options.
- Loan brokers: Brokers have a network of lending partners and can use their expertise to match you with the loan best suited for your needs. Any of the providers in our guide to the leading business loan brokers can save you time from applying separately to multiple lenders.
Once you’ve found an applicable lender, confirm your eligibility and submit a formal loan application. You’ll need to supplement the application with various documentation, as requested by the lender.
The exact list of required documents will vary based on the loan, the lender you choose, and your specific circumstances. Commonly requested items include tax returns, bank statements, and other financial statements—such as a balance sheet and profit & loss statement.
Upon reviewing your application, the lender will confirm your eligibility. If approved, it will provide you with loan details, including rates and terms.
Frequently Asked Questions (FAQs)
Since there are various types of multifamily financing, credit score requirements will vary. Lenders will have other determining factors when issuing a lending decision; however, you should aim for a score of at least 600 to be considered eligible for most forms of financing.
It depends on the type of loan you get. Typically, there are owner-occupancy requirements necessary for government-backed loans. As a condition of the investment, you must reside and conduct business at the property to be eligible for financing opportunities.
Qualification criteria will vary depending on the loan type and lender. Generally, credit score, experience, DSCR, and assets are taken into consideration. Keep in mind that the weight of such criteria can fluctuate, but it’s best if you meet the basic guidelines requested by the lender for greater chances of approval.
Bottom Line
Multifamily financing allows you to purchase properties with two or more units. This can include multifamily residential homes and more complex properties, such as apartments. Now that you know what multifamily financing is and the various loan types, you can determine which may apply to your real estate investments.
Whether you plan on purchasing, renovating, or refinancing a property, multifamily financing can support your investment needs. Be sure to shop around for a lender with rates and fees that fit your budget.
