How to Finance an Apartment or Multi-Family Residence

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You can get an apartment loan or multi-family financing that is either short term or permanent to fund the purchase or renovation of the building, with rates that typically range from 5% to 12%. Investors usually use the financing of apartment buildings to buy properties with more than five units to produce cash flow and build equity.

Take advantage of government backed mortgage options for competitive apartment loans and multi-family financing available today.

apartment loans

There are three basic types of loans to consider financing an apartment building or multi-family residence:

Government Backed Apartment Loan

Government backed apartment loans are offered by Freddie Mac, Fannie Mae and FHA. These government organizations offer these apartment loan programs offer options with loans from $750,000 to $6 million. These commercial loans offer the highest LTV option for investors with FHA multi-family loans. You can finance up to 87% of the purchase price of an apartment building.

A government backed loan can be a good fit for a local investor because there are many loan options, and the borrower needs to have local ownership. This means they can only buy an apartment building in the community in which they live.

Government loans are also available from Fannie Mae. It offers apartment and multi-family loans that range from $750,000 to more than $5 million. The agency’s loan program for small balances has a maximum loan amount of $5 million. The multifamily loan program has a floor of $3 million but does not have a cap. The maximum LTV for both is 80%.

Freddie Mac has two apartment building loan programs. The small balance loan program offers loans from $1 million to $6 million. The bigger apartment loan program has a floor of $5 million but has no cap. The maximum LTV is also 80%.

FHA’s program has eight different options but the HUD FHA 223f loan is probably the most important for apartment lending. The loan floor for the program is $1 million but does not have a maximum amount. The maximum LTV is 87%.

So, investors who want to use Fannie Mae and Freddie Mac should expect to need a down payment of 20%. For FHA, investors will need to cover a down payment of 13%.

Costs for Fannie Mae and Freddie Mac loans are usually with rates of 4.5% to 6%; loan origination fees of 1%; closing costs between 2% and 5% and a prepayment penalty of 1%.

These fees usually come from the loan and are not out of pocket. For a Fannie Mae apartment loan, rates are usually fixed throughout the loan term. For Freddie Mac, rates are often fixed for five to 10 years before going to an adjustable rate. The adjustable rate is usually based upon the six-month LIBOR rate.

Once the loan goes to the adjustable rate, the maximum rate of increase cannot be above 5%. Rates can then adjust every six months. Freddie Mac allows you to make as many as three years of interest payments.

Government backed multifamily and apartment loans are issued by government approved lenders. These apartment lenders might be credit unions, banks, finance companies and others. One of the top providers of government backed apartment loans is the Commercial Real Estate Finance Company of America.

Another option for some buyers is a bank balance sheet apartment loan. They are originated by banks and sit on their balance sheets. This type of financing is not backed by the US government or its various agencies. The banks handle their own due diligence and issue loans at their own discretion.

A bank balance sheet loan can be a good fit for the investor who does not live in the property. Bank loans are known as recourse loans that hold the borrower liable, but it makes it easier to qualify. So, they can be a good move for investors who may not qualify for a loan backed by the US government.

A minimum loan for a bank balance sheet loan is typically $500,000, with an LTV up to 80% and a down payment of 20%.

You also can get a short-term apartment loan with higher financing that is similar to a hard money loan. This is to renovate the building and buy time until you can qualify for a longer term, lower interest loan.

About Tom Murphy

Tom Murphy grew up in La Jolla, California surfing and carving his niche in the local real estate market. Mr Murphy has a stellar record as a loan officer with over a decade of experience helping people secure the right home loan.