Are you interested in commercial real estate? Good! Investing in multi-family residences can be an outstanding investment that can provide you with steady cash flow for many years. Most of us don’t have the cash to buy a commercial property outright, so there are various commercial loans available that can get the deal done.

Learn How to Get the Best Loan for a Multi-Family Home

multi-family loans

Conventional multi-family mortgages typically follow a 15- or 30-year amortization schedule, while short-term loans may span as little as six months to three years, often with the possibility of extensions.

Unlike residential mortgages, commercial real estate loans generally lack specific loan amount constraints, although individual banks may impose their own limits.

Below is what you need to know about the multi-family loans available to buy commercial real estate.

MFR loans are projected to become very popular in states were zoning laws are favorable to multi-family residence construction.

Government-Backed Commercial Loans

There are several government-backed loans you can use to buy multi-family residences. These are large government entities, including Freddie Mac, Fannie Mae, and FHA.

These organizations have programs that fund commercial property loans from about $75,000 to $6 million. Usually, commercial loans from FHA will offer you the highest loan-to-value. In some cases, you may be able to get an FHA home mortgage for your multi-family residence with only about 13% down.

Another option with FHA financing is if you decide to buy a smaller multi-family property, such as a four-unit building. If you live in one of the units and rent the other three, you can qualify for an FHA mortgage with only 3.5% down. Plus, FHA allows you to use the rent you get from the other three units as qualifying income.

Loans backed by FHA can be a perfect fit for many commercial investors because they have many programs, and you also need to live locally. But this also means you only can buy a property in the city in which you live.

Fannie Mae Loans

If you buy a multi-family residence, you may be able to use the rental income from the building to qualify for the loan. Lenders will consider that income as long as you can show the documentation that proves the renters are paying you on time.

For Fannie Mae loans where you intend to live in the building, it needs to be a two-to-four unit building that you occupy, or an investment property with one to four units.

However, not all income will apply; Fannie Mae will subtract 25% from the rent amount for maintenance and vacancies.

Also, you need to show proof that the rental income from the building is stable. Some of the proof you can show is a current lease, agreement to lease, or two years of rent history. The lender may also require that you should your 1040 schedule E to show that you reported the rent on your tax return.

You also can get a government-backed MFR loan from Fannie Mae. This entity has loans from $750,000 to at least $5 million. You will need to have a 20% down payment to qualify for this loan.

For investors interested in Fannie Mae and Freddie Mac loans, rates can range from about 4-6%, with loan origination fees of 1% and a 1% prepayment penalty.

The fees charged usually are from the commercial loan, so you don’t need to pay out of pocket.

For a multi-family loan from Fannie Mae, the rates are probably fixed, but Freddie Mac often has fixed rates for five or 10 years and then it’s adjustable. The rate is usually based on the LIBOR rate for six months, but it varies by the specific lender.

When the loan is adjustable, the most it can increase is 5% and the rates will adjust every 180 days. With Freddie Mac, you can make three years of interest only payments.

Higher Down Payments

As noted earlier, one aspect to understand about multi-family residence loans is you usually need a higher down payment to secure the loan. You usually need to have at least 20% down. This is the case if you want to buy the building but not live there.

This is usually because most investment properties don’t qualify for private mortgage insurance, so you need to put down more money to get regular financing. Lenders usually will assume there is more risk with an investment property, so they may require you to put 25% down.

Another good option for multi-family residences is the FHA loan with lower down payments of 3.5% and low closing costs. This loan can be the perfect option if you don’t have perfect credit and plan to live in the building.

However, you may want to consider other options if you have great credit and enough cash to make a 15% down payment. After all, FHA loans can cost more over the years than a conventional mortgage.

If you want a government-backed MFR loan, you should visit lenders that are approved by FHA, Fannie, or Freddie. Some of the places you can try are banks, credit unions, finance companies, etc.

Bank Balance Sheet Loans

Another option to consider is a bank balance sheet multi-family loan. These loans are created by banks and are on their quarterly balance sheets. Note that this commercial financing isn’t backed by a government entity. Your bank will do its due diligence and issue commercial loans that they think are a reasonable risk.

Terms vary, but many bank balance sheet loans have a minimum loan amount of $500,000 with a 20% down payment.

Another option is a short-term multifamily loan with more expensive financing that works like a hard money loan. This money can be used to rehab the property until you can get a long-term commercial loan.

As we have shown, you have several options if you want to own a commercial building for cash flow. Please talk to a commercial lender today to determine the best loan option for you.

Takeaway on Multi-Family Home Loans

The process of purchasing a multifamily property differs significantly based on whether the property comprises more than four units or less than five units. Both types offer the potential for increased investment income compared to single-unit properties, and the option to reside in one unit can help mitigate housing expenses.

However, multifamily properties entail higher costs and necessitate larger down payments, demanding a solid financial foundation to venture into this asset class. True multifamily properties with five or more units mandate collaboration with a commercial lender rather than a mortgage lender. If you’re prepared to expand your real estate portfolio by acquiring a multifamily property consisting of two to four units, explore your financing options today to secure the best available terms.