Multifamily financing is a type of mortgage that can be used for the purchase or refinance of smaller multifamily properties (with 2-4 units), and large apartment buildings that have many units. Multifamily loans are a good tool for both first time real estate investors and seasoned professionals.

If you’re looking for a permanent multifamily loan for rental units you can check out Visio Lending. They’re a national lender that can finance 2 – 4 unit buildings up to 80% LTV. Terms are 30 years with fixed or variable rates that start as low as 5.05%. Apply today in minutes and see if you qualify.

Visit Visio Lending

4 Types of Multifamily Financing

There are four common multifamily financing options available to real estate investors who are looking to purchase or renovate a property with between 2 – 20+ units. Each of these loans have their own unique terms, rates, and qualifications.

The four multifamily financing option are:

1. Conventional Mortgage – Terms between 15 – 30 years. Loans are capped at 80% LTV and typically have interest rates between 4% – 6%.
2. Government-Backed Loan – Terms between 5 – 35 years. LTV capped at 87%. Interest rates between 3% – 6%.
3. Portfolio Loan – Terms between 3 – 30 years. LTV of up to 97%. Interest rates from 3.70% – 5.70%.
4. Short-Term Multifamily Financing – Terms between 1 – 3 years. Interest rates of 4% – 12%. Monthly payments are typically interest-only.

1. Conventional Mortgage for Multifamily Properties

Conventional mortgages for multifamily properties are permanent “conforming” loans offered by traditional banks and lending institutions. These mortgages are long-term with terms between 15 – 30 years. Conventional mortgages can finance multifamily properties between 2 – 4 units but can’t finance apartment buildings with 5+ units. Further, conventional mortgages can finance up to 4 – 10 investment properties at once.

Conventional mortgages are considered to be conforming because they typically adhere to Fannie Mae’s required qualifications and maximum loan amounts. However, conventional mortgages for multifamily financing aren’t backed by the federal government. Let’s take a moment to look at a conventional mortgage for multifamily financing in greater detail.

Conventional Mortgage for Multifamily Homes: Rates, Terms, & Qualifications

Conventional Mortgage for Multifamily Home Amount & Down Payment

Conventional mortgages for multifamily loans typically have a range of possible loan amounts that start at $100,000 and follow the Fannie Mae guidelines for maximum loan limits. These limits are region-specific but are currently between:

• 2-unit property: $533,800 – $800,755
• 3- unit property: $645,300 – $967,950
• 4-unit property: $801,950 – $1,202,925

Further, the usual conventional mortgage for multifamily home has a maximum loan-to-value (LTV) ratio equal to 80% of a multifamily property’s purchase price.

This means that an investor’s typical down payment with a conventional multifamily loan is 20% or more of the property’s purchase price. This is fairly standard when compared to more traditional residential property loans.

Conventional Mortgage for Multifamily Home Interest Rates & Fees

Conventional mortgages for multifamily financing typically have interest rates that range from 4% – 6%, which is similar to the rates found with traditional mortgages. The rates found on a conventional mortgage can be either fixed or variable.

Fixed rates are fully amortized throughout the loan’s term while variable rates typically reset after a 7 – 10 year period. Variable interest rates are based on the 6-month stated LIBOR rate and there is usually a cap equal to the starting interest rate plus 5% – 6%.

When it comes to the fees associated with a conventional mortgage for multifamily property, lenders typically charge the following:

• Loan origination fees: 0% – 3%
• Closing costs: 2% – 5%

You might also be charged a minimum $500 appraisal fee as well as an application fee that’s typically around $100 – $200. The application fee will sometimes cover the appraisal. Loan origination fees and closing costs are typically taken directly out of the loan.

Conventional Mortgage for Multifamily Property Terms

Conventional mortgages for multifamily financing typically have terms that range from 15 – 30 years. The time to approval and funding is usually between 30 – 45 days, making it a permanent multifamily loan option.

Conventional Mortgage for Multifamily Property Qualifications

The first qualification you need to be concerned with is that conventional mortgages for multifamily financing can only finance a multifamily property between 2 – 4 units. This means that they can’t finance apartment buildings with 5+ units. If you have a property with 5 or more units, you’ll want to look into government-backed multifamily loans and multifamily portfolio loans.

Further, conventional mortgages typically don’t finance a rehab or renovation project. Therefore, the second qualification you need to mind is that all multifamily properties have to be in good condition prior to financing. The other important qualifications include:

• Personal credit score: 680+ (check your credit score for free here)
• DSCR: 1.25, which is the amount of cash flow available to cover debt payments
• Cash reserves: 6 – 12 months

Where to Find a Conventional Mortgage for Multifamily Properties

You can find and apply for a conventional mortgage for multifamily homes at most traditional banks or lending institutions. For example, US Bank has a conventional mortgage option that can finance an investment property between 2 – 4 units. However, if you have a prior relationship with a lender or mortgage broker, it makes sense to start with them first.

2. Government-Backed Multifamily Financing

Government-backed multifamily financing are multifamily loans sponsored by Fannie Mae, Freddie Mac, as well as the FHA. There are more than 5 government-backed multifamily financing options available to investors which can either finance properties with 2 – 4 units or properties with 5+ units. Government-backed multifamily financing have terms between 5 – 35 years and are issued by government-approved mortgage lenders.

Let’s look at the three broad government-backed multifamily financing options in greater detail:

Government-Backed Multifamily Financing Rates, Terms, & Qualifications

Government-Backed Multifamily Financing Loan Amount & Down Payment

Both Fannie Mae as well as Freddie Mac have conforming multifamily loans that can finance properties between 2 – 4 units. For these government-backed conforming loans, the minimum loan amount can be as low as $100,000 and the maximum amount is as follows:

• 2-unit property: $533,800 – $800,755
• 3- unit property: $645,300 – $967,950
• 4-unit property: $801,950 – $1,202,925

The loan amount for these conforming government loans are also capped at 80% of a property’s loan-to-value (LTV) ratio. This means that real estate investors should expect to cover at least 20% of a multifamily property’s purchase price as the down payment.

Fannie Mae and Freddie Mac also have multifamily financing loans that can finance properties with 5 or more units. These government-backed loans, which are often referred to as “small balance loans” or “multifamily loans,” typically have the following loan amounts:

• Fannie Mae: $750,000 – $3,000,000+
• Freddie Mac: $1,00,000 – $6,000,000+

For both Fannie Mae and Freddie Mac, the maximum loan amount is set at 80% of a property’s LTV. This means that like the conforming loans above, investors should expect to cover at least 20% of the multifamily’s purchase price as the down payment.

The FHA, on the other hand, doesn’t have a loan product for multifamily properties with less than 4 units. Instead, it has an FHA 223(f) apartment loan option for multifamily properties with 5 or more units. The minimum loan amount is $1,000,000 and there is no maximum amount.

However, the FHA 223(f) apartment loan can finance up to 87% of a property’s LTV, meaning that the down payment would only be 13% or more of the purchase price.

Government-Backed Multifamily Financing Interest Rates & Fees

The average interest rate found on a Fannie Mae or Freddie Mac multifamily loan is currently between 3% – 6%. These interest rates can either be fixed or variable. Fixed rates are typically amortized over the term of the loan while variable interest rates adjust after 3 – 10 years based on the current 6-month LIBOR rate. There is usually a maximum interest rate increase around 5%

When it comes to the fees on a multifamily loan, Fannie Mae and Freddie Mac are also similar. For example, the typical fees found on these government-backed loans include:

• Loan origination fees: 0% – 1%
• Closing costs: 2% – 5%
• Prepayment penalty: 1%

These costs are usually taken directly out of the loan and aren’t considered out-of-pocket costs.

For the FHA-backed multifamily loan, interest rates are currently between 3% – 5% and are fixed throughout the loan’s term. When it comes to the other costs associated with the FHA 223(f) loan, the fees are comparably higher:

• Loan origination fees: 0% – 3%
• Closing costs: 2% – 5%
• FHA inspection fee: 1%
• Mortgage insurance premium: 1%
• Legal fees: $10,000+

Government-Backed Multifamily Financing Terms

Both Fannie Mae as well as Freddie Mac multifamily loans have terms between 5 – 30 years. Shorter terms have adjustable rates while longer terms have fixed rates that are fully amortized. The time to approval and funding with these multifamily loans can be anywhere from 60 – 90 days.

For FHA-backed multifamily loans, the term can be as long as 35 years and interest rates are fixed over the entire term. Since there are more regulations and guidelines with FHA loans, the time to approval and funding is longer at 60 – 180 days.

Government-Backed Multifamily Financing Qualifications

Fannie Mae and Freddie Mac’s multifamily financing options together can fund the purchase of a multifamily property between 2 – 5+ units. Just remember that the conforming loans can finance properties between 2 – 4 units while the nonconforming multifamily loans can finance properties of 5+ units.

Specifically, the qualifications for these loans are as follows:

• Units: 2 – 5+
• Personal credit score: 650 – 680+ (check your credit score for free here),
• DSCR: 1.25+, which is the amount of cash flow available to cover debt payments
• Minimum occupancy: 85% – 90%
• Liquidity: 9+ Months
• Occupancy: 3+ Months

However, the FHA-backed multifamily financing product has different qualifications. First, it can only finance apartment buildings with 5 or more units. Further, it requires the following minimum qualifications:

• Units: 5+
• Personal credit score: 650+ (check your credit score for free here),
• DSCR 1.15+
• Minimum occupancy: 95%
• Liquidity: 9+ Months
• Occupancy: 6+ Months

Where to Find Government-Backed Multifamily Financing

The Fannie Mae, Freddie Mac, and FHA multifamily financing options are originated and offered by government-approved mortgage lenders. For example, the Commercial Real Estate Finance Company of America offers all government-backed multifamily loan options. Other lenders such as Chase Bank and US Bank also offer these types of loans.

3. Portfolio Loan for Multifamily Properties

A portfolio loan for multifamily properties is a nonconforming loan used to purchase a multifamily property between 2 – 5+ units. Portfolio loans for multifamily properties are permanent mortgages with terms between 3 – 30 years. These types of multifamily loans are more flexible when compared to conforming loan alternatives and can finance more than 4 – 10 properties at once.

Lenders can be traditional banks, credit unions, as well as private lenders. Let’s look at an average balance sheet multifamily loan in more detail:

Portfolio Loan for Multifamily Financing Rates, Costs, & Terms

Portfolio Loan for Multifamily Financing Loan Amount & Down Payment

Portfolio loans for multifamily financing aren’t required to meet Fannie Mae or the other government organization’s requirements for maximum loan amounts and down payments. This means that portfolio loans are more flexible than conforming multifamily loans.

The typical loan amount for a portfolio loan starts at $100,000 and doesn’t have a maximum loan limit. However, portfolio loans for multifamily financing can potentially finance up to 97% of a property’s loan-to-value (LTV) ratio. This means that investors should expect to cover at least 3% of a property’s purchase price as a down payment.

Portfolio Loan for Multifamily Financing Interest Rates & Fees

Portfolio loans for multifamily financing typically have interest rates that range from 4% – 6% or higher. Interest rates can be either fixed or variable. Like the other multifamily loans, variable interest rates are typically fixed for 5 – 10 years before adjusting every 6 months based on the 6-month LIBOR rate.

The fees associated with a portfolio loan for multifamily financing are fairly standard. They include such things as:

• Loan origination fees: 0% – 3%
• Closing costs: 2% – 5%
• Prepayment penalty: 1%

These costs are taken directly out of the loan. Interest rates and fees are largely dependent on the lender you work with.

Portfolio Loan for Multifamily Financing Terms

Portfolio loans typically have terms that range from 3 – 30 years. However, the most common types of portfolio loans for mutifamily financing will often have a term of 15 – 30 years. The usual time to approval and funding is between 30 – 45 days.

Portfolio Loan for Multifamily Financing Qualifications

Portfolio loans for multifamily financing have minimum qualifications that vary depending on the lender. However, when you’re looking for a portfolio loan, it’s common to see the following qualifications:

• Units: 2 – 5+
• Personal credit score: 600+ (check your credit score for free here),
• DSCR 1.25+
• Minimum occupancy rate: 90%
• Liquidity: 9+ Months
• Occupancy: 3+ Months

Where to Find Portfolio Loans for Multifamily Financing

Remember that since portfolio loans are nonconforming loans, they’re offered by lenders of all shapes and sizes. Traditional banks, credit unions, savings and loans, as well as private lenders can all offer portfolio loans.

Visio Lending offers multifamily portfolio loans for rental properties with 2 – 4 units. The national lender can finance up to 80% LTV. Terms are 30 years with fixed or variable rates that start as low as 5.55%. Apply online and prequalify in minutes.

Visit Visio Lending

4. Short Term Multifamily Financing

Short term (non-permanent) multifamily financing is a non-permanent multifamily loan option with terms that range from 6 – 36 months. These loans include both hard money loans and bridge loans with monthly payments that are usually interest-only. Short term multifamily financing loans are typically used to purchase a multifamily property before refinancing to a permanent loan later.

The two types of non-permanent multifamily financing are:

• Hard money loans
• Bridge loans

These short-term loans are used to season, renovate, or increase the occupancy a multifamily property in order to meet the stricter requirements of a permanent multifamily loan. Further, some investors use these non-permanent options to buy a property and wait until they meet the personal qualifications before refinancing.

Non-permanent multifamily financing options can typically finance properties of 2 – 5+ units. Let’s take a look at the two types of non-permanent multifamily loan options in greater detail.

Short Term Multifamily Financing Rates, Costs, & Terms

Short Term Multifamily Financing Loan Amount & Down Payment

Non-permanent multifamily financing typically has a loan amount that starts at $100,000 and has no maximum dollar amount. However, both hard money loans as well as bridge loans will usually have a maximum loan amount up to 90% of a property’s loan-to-value (LTV) ratio and up to 75% of a property’s loan-to-cost (LTC) ratio.

The LTV ratio is based on a multifamily property’s current fair market value and is used to finance properties in good condition. The LTC ratio, on the other hand, is based on the combined costs of purchasing and renovating a multifamily property and is used for properties in poor condition.

This means that an investor should expect to cover 10% or more of a property’s purchase price or 25% or more of a property’s purchase price plus renovation costs.

Short Term Multifamily Financing Interest Rates & Fees

The interest rates found on short term multifamily financing options vary widely. For example, hard money loans can have interest rates between 7% – 12% while bridge loans can have interest rates that range from 4% – 12%. Interest rates are largely dependent on the lender.

When it comes to fees, both hard money loans and bridge loans have similar fee structures, which include:

• Loan origination fees: 1% – 3%
• Exit fee:1%
• Extension fee: 1%
• Prepayment penalty: 1%

These costs are typically taken out of the loan and don’t come out-of-pocket.

Short Term Multifamily Financing Terms

The terms of a non-permanent multifamily financing option are short and typically between 6 – 36 months. This means that investors will typically either have to flip the property or refinance with a permanent multifamily loan at the end of the term.

However, the time to approval and funding is also short, making it advantageous for investors who need to compete with all-cash buyers. For hard money loans, the typical time to funding is between 10 – 15 days. For bridge loans, the time to funding is between 15 – 45 days.

Short Term Multifamily Financing Qualifications

The qualifications of short-term multifamily financing differ depending on the loan type and the lender. For example, hard money lenders typically require the following for their hard money loans:

• Units: 2 – 5+ Unit Building,
• Minimum credit score: 550+ (check your credit score for free here),
• Experience: 2 – 3 past rehab projects or multifamily experience
• No subordinated debt

For bridge loans, the qualifications are a little different, and often include:

• Units: 2 – 5+ Unit Building,
• Minimum credit score: 640+ (check your credit score for free here),
• Experience: 2 – 3 past rehab projects or multifamily experience
• No subordinated debt
• Required interest reserve for properties below 1.05 DSCR

Where to Find Short Term Multifamily Financing

Hard money lenders such as Patch of Land offer 12 – 24 month short-term financing options for 2 – 4 unit buildings, condos, townhomes, and multi-family apartments. You can borrow up to 85% LTV with a max of $3mm. Interest rates start at 8% and their application can take minutes.

Visit Patch of Land

Multifamily Loan Key Terminology

Before you decide on the right multifamily financing option for you, there’s some terminology that you’ll want to be familiar with. This will help you interact with lenders, brokers, and other real estate professionals:

• Loan-to-Value Ratio (LTV): The loan amount divided by the value of the property.
• Debt-to-Income Ratio (DTI): Your total monthly or annual debt payments divided by your income.
• Debt Service Coverage Ratio (DSCR): The difference between your total monthly or annual debt payments and the revenue available to pay those debts (like DTI, but for businesses and investment real estate)
• PITI: Principal, Interest, Taxes & Insurance
• Occupancy Rates: The percentage of your investment property that is currently rented.
• Seasoning: A period of time you must meet occupancy requirements prior to obtaining financing.
• Cash Reserves: Cash that you must prove to have available to support you PITI, just in case.
• Fully Amortized: A repayment schedule where regular payments will repay the entire loan by the end of the term.
• Partially Amortized: A repayment schedule where regular payments will leave an unpaid balance by the end of the term (resulting in a balloon payment or need to refinance).
• Balloon Mortgage: A mortgage that is partially amortized resulting in a large balance owed at the end of the repayment term.
• Adjustable Rate Mortgage (ARM): A fully amortized mortgage with an interest rate that will adjust up and down according to market interest rates.

Multifamily Financing Is Used for Two Types of Properties

Multifamily mortgages can finance two types of properties. The first is a residential investment property with between 2 – 4 units. The second is an apartment building with 5+ units. This distinction between the types is important because the number of units dictates the types of multifamily financing options.

For example, conventional mortgages can only finance residential income properties between 2 – 4 units. Government-sponsored loans and short-term financing options, on the other hand, can finance both residential income properties as well as apartment buildings with 5 or more units.

Permanent Multifamily Financing Options

Permanent multifamily mortgages have repayment terms of 5 to 35 years and have a loan-to-value ratio (LTV) of up to 87%. Interest rates range between 3% to 6% and rates can be fixed or variable. Permanent multifamily mortgages are the most common type of multifamily financing and account for 93% of outstanding multifamily loans.

Permanent multifamily financing can be both short-term or long-term. For example, short-term permanent loan options are offered by government agencies and have terms between 5 – 10 years. These shorter-term multi-family loan options will sometimes have a balloon payment, making them a good option for:

• Investors who intend to pay off a multifamily loan within 10 years
• Investors who need lower payments at the start of the loan
• Investors who want an adjustable rate loan
• Investors who want to renovate a multifamily property over a 5 – 10 year period

On the other hand, long-term permanent multifamily financing has terms between 10 – 35 years. Monthly payments are typically amortized over the entire term. What’s more, interest rates are typically fixed. Long-term permanent multifamily financing options are right for the following investors:

• Investors looking to purchase a long-term multifamily property
• Investors looking to refinance an existing multifamily property
• Investors looking to cash out refinance an existing multifamily property

Temporary Multifamily Financing Options

Temporary (short-term) multifamily loans, such as hard money loans, are mortgages with terms between 6 – 36 months. Monthly payments are typically interest-only with fixed rates between 4%- 12% or more. Temporary multifamily financing options are used to purchase, renovate, season or sell a multifamily property before refinancing to a permanent mortgage at a later date.

The investors who benefit most from non-permanent multifamily financing options include:

• Investors who need to season a multifamily property
• Investors who need to increase the occupancy rate of a multifamily property
• Investors who may want to renovate a multifamily property
• Investors who don’t meet the stricter qualifications of a permanent multifamily loan
• Investors who need to compete with all-cash buyers

Overall, investors of multifamily properties should be willing to be active in the management of the property. They should have at least 9 months cash reserves not only to cover monthly loan payments through vacancy periods but also to cover unforeseen repairs as needed.

Bottom Line: Multifamily Financing

Multifamily loans are used by investors to finance multifamily properties between 2 – 5+ units. These properties can include condos, townhomes, duplexes, apartment buildings and more. However, there are many different multifamily financing options available and it’s important to understand the best ways to invest in real estate.

VisioLending offers permanent multifamily loans for rental properties with 2 – 4 units. The national lender can finance up to 80% LTV. Terms are 30 years with fixed or variable rates that start as low as 5.05%. Apply today in minutes.

Visit Visio Lending