Multifamily loans let real estate investors buy multiunit residential buildings and complexes. The four main types of multifamily commercial real estate loans are conventional, government-backed, portfolio, and short-term loans—each with its own set of terms and conditions. If you’re in the market for multifamily financing, make sure you understand the different types of multifamily loans available before committing to a lender and terms.
Types of Multifamily Financing
|Loan Type||Loan Amounts||Recourse||Interest Rates||Terms|
|Government-backed||$750,000 to $100 million||3.7% to 7%||5 to 35 years|
|Portfolio||Varies by lender||✓||4% to 12%||2 to 30 years|
|Short-term||$1 million and up||✓||Start at 5.5%||6 to 36 months|
|Conventional||Up to $1.8 million||5.5% to 8%||10 to 30 years|
The most common types of multifamily loans are:
1. Government-backed Multifamily Mortgage
A government-backed loan for multifamily real estate is a mortgage that is guaranteed by a governmental agency, such as the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA). These loans are typically used to finance the purchase or rehabilitation of apartments or other multifamily dwellings.
- FHA/HUD multifamily loans. FHA multifamily loans are insured by the Federal Housing Administration and are available to borrowers with lower credit scores. Rates on FHA multifamily loans are typically higher than rates on conventional multifamily loans.
- VA multifamily loans. VA multifamily loans are guaranteed by the Department of Veterans Affairs and are available to eligible veterans. Rates on VA multifamily loans are typically lower than rates on other types of multifamily loans.
Government-backed loans offer several advantages, including low down payment requirements and favorable interest rates. However, they also come with certain restrictions, such as limits on the number of units that can be financed and income requirements for borrowers. For these reasons, government-backed loans are an important financing tool for many apartment investors—but may not be the best option for everyone.
2. Portfolio Multifamily Loan
A portfolio loan for multifamily real estate is a loan that is held by a bank, fund, or financing company, rather than being securitized and sold on the secondary market. For this reason, portfolio loans can often be larger and have more flexible terms and qualification requirements than conventional loans.
When many people hear the term “portfolio loan,” they think it references a loan made against a portfolio of properties, and in some cases that is true. In fact, many portfolio loans are issued to investors who own many properties, including properties that have two or more dwelling units. However, portfolio loans for multifamily real estate are often used to finance the purchase or refinance of apartment buildings and other types of multifamily properties.
These loans are typically offered by private lenders, like insurance companies and pension funds. And, while rates on portfolio multifamily loans vary by lender, they’re typically higher than those available on other types of multifamily loans.
3. Short-term Multifamily Loan
Short-term loans are a type of financing used to purchase or refinance multifamily real estate. This type of loan is typically used to finance the purchase or renovation of multifamily properties, and they can be an important tool for investors who are looking to buy and hold these types of assets.
Also known as multifamily bridge loans, short-term loans typically have terms of one to five years, and can be obtained from private lenders, such as hard money lenders. Rates on short-term multifamily loans are generally higher than rates on other types of multifamily loans, but they’re also typically easier to get and faster to close.
While short-term loans can provide real estate investors with the capital they need to purchase or improve multifamily properties, it is important to carefully consider the terms of the loan before signing on the dotted line. Investors should make sure that they will be able to repay the loan in full before the end of the term, as failure to do so could result in losing the property to foreclosure.
4. Conventional Multifamily Mortgage
A conventional mortgage is a residential mortgage that is issued against a multi-family property and securitized by a national mortgage association like Fannie Mae or Freddie Mac. Unlike an FHA or VA loan, a conventional mortgage is not backed by the government and can be obtained from private lenders, commercial banks, and credit unions.
Getting a conventional mortgage on a multi-family loan is very similar to getting a loan for a single-family home. To qualify for a conventional mortgage, borrowers typically need to have good credit and a down payment of at least 20%. Loans are only available on properties up to four units, and one of the units must be owner-occupied.
Because conventional mortgages are not backed by the government, they generally come with stricter eligibility requirements. For example, with a conventional multi-family mortgage, the holding costs for all units (insurance, taxes, etc.) will be included in calculating debt-to-income ratios—even though investors may plan to rent out all but one of the units.
As a result of these strict qualifications, borrowers should carefully compare all their options before choosing a conventional mortgage.
How to Apply for a Multifamily Loan
Applying for a multifamily loan can be a complex process, but working with the right lender can make it easier. Start by searching online for a lender that offers multifamily financing or by asking friends, family, and business connections for recommendations.
When interviewing lenders ask about their experience with multifamily loans. Once you find a few potential lenders, compare rates and terms. Then, identify the best option and submit a loan application.
Loan applications vary by lender, but most financial institutions require applicants to provide information about their income, assets, and liabilities. When you’re ready to apply for a multifamily loan, be sure to have the following information on hand:
- Your personal financial information, including your credit score and income
- The property’s address, square footage, and number of units
- A business plan for the property, if you have one
- An estimate of the property’s value
After submitting the loan application, the lender will review your credit history and financial situation to determine whether you’re eligible for a multifamily loan.
If you’re approved for a multifamily loan, the next step is to accept a loan offer or modify the terms based on your borrowing needs. This may include the interest rate, repayment schedule, and other terms and conditions. Once your information is verified, sign the loan contract when closing on the property, and begin making payments on the loan.
Frequently Asked Questions (FAQs) – Multifamily Loans
What is multifamily lending?
Multifamily lending is the process of providing financing for the purchase or renovation of multifamily properties. These loans are typically used by investors who are looking to buy and hold these types of assets. Multifamily loans can be obtained from a variety of sources, including banks, credit unions, and private lenders.
Rates on multifamily loans vary depending on the type of loan and the lender, but they are typically higher than rates on other types of loans. Multifamily lending can be a complex process, but working with the right lender can make it easier. When considering multifamily loans, be sure to compare rates and terms from multiple lenders before choosing one.
What credit score do you need for a multifamily home?
There is no one-size-fits-all answer to this question, as the credit score required for a multifamily home loan varies depending on the lender and the type of loan. However, borrowers with good credit scores (700 or above) will typically qualify for the best rates on multifamily loans. Borrowers with lower credit scores may still be able to qualify for a multifamily loan, but they will likely pay a higher interest rate.
What is a multifamily bridge loan?
A multifamily bridge loan is a type of financing used to purchase or refinance multifamily real estate. These loans typically have terms of one to five years, and they often come with higher interest rates than traditional bank loans. Multifamily bridge loans are typically used to finance the purchase or renovation of multifamily properties, and they can be an important tool for investors who are looking to buy and hold these types of assets.
What is the difference between single family and multifamily?
The main difference between single family and multifamily homes is that multifamily homes are designed for multiple occupants, while single family homes are designed for one household. That said, multifamily homes can come in a variety of shapes and sizes, from duplexes and triplexes to apartment buildings.
These properties can be an attractive option for investors who are looking to generate rental income. However, they can also be more expensive to purchase and maintain than single family homes. Before investing in multifamily real estate, do your research and understand the advantages and disadvantages of this type of investment.