Multifamily Construction Loan

IN THIS GUIDE

If you’re like most developers, you might not have all the capital necessary to fund your multifamily construction project. 

That’s where multifamily construction loans come in.

Multifamily construction loans are a specific type of construction loan used by real estate developers to finance multifamily properties.

Typical multifamily projects include apartment complexes, commercial office buildings, and more.

In this article, we’ll explain what a multifamily construction loan is, break down the different types, show how to qualify for this loan, and more. 

 

How to get a Multifamily Construction Loan

There are multiple options when it comes to securing a multifamily construction loan. Here are 3 of the most common: 

  1. HUD 

HUD offers competitive fixed-rate, fully amortized, high-leverage, non-recourse financing. HUD 221(d)(4) loans typically come with certain terms:

  • 40-year loan terms (+3 year interest only construction loan period, 43 years total)
  • Available for both ground-up construction and substantial rehabilitation of properties with 5+ units 
  • Minimum loan amount of $4M, no maximum loan amount
  • Competitive fixed interest rates
  • Nonrecourse financing

HUD 221(d)(4) loans take 7-10 months to close, and they usually come with a substantial amount of red tape. If you’re looking to close quickly, HUD loans might not be a great option.

  1. Banks 

Banks are another source of multifamily construction loans. 

Many small banks now lend up to 65% of the project cost at competitive interest rates. Regional banks can be even more aggressive. 

  1. Fannie Mae

Fannie Mae is another great option when it comes to financing your multifamily construction project. Fannie Mae offers numerous specific loan products, so visit their website for more details. Generally, most Fannie Mae loans have the following characteristics: 

  • Available nationwide
  • Loans start at $1 million
  • Highly competitive interest rates
  • 30-year fixed rate option
  • 30-year amortization
  • Up to 10 years interest-only
  • Up to 80% LTV/75% for cash-out refinancing 
  • Non-recourse and assumable loans 

How to qualify for a Multifamily Construction Loan

Because multifamily construction loans finance projects that require an immense amount of capital, lenders will require proof of liquidity—typically 20% of the loan amount. 

In order to lessen the financial burden per borrower, many investors develop multifamily properties with partners. 

These partnerships let investors pool their capital to qualify for a larger loan and develop a larger property than they would be able to finance on their own. 

Additionally, partnerships decrease the level of risk assumed by each member of the deal.

Sample terms for a Multifamily Construction Loan

  • Size: Up to $2M

 

  • Amortization: Up to 40 years fixed, fully amortizing 

 

  • Maximum LTC: 75% (85% with HUD for market-rate properties)

 

  • Rate: Varies, loans generally are floating-rate, interest-only financing

 

  • Maximum LTV: 75% (no maximum LTV with HUD 221(d)(4))

 

  • Minimum DSCR: 1.20x

 

  • Time period: 12-24 months

FAQs

Multifamily construction loans are another type of bridge loan. Commercial real estate developers often use this type of loan to finance the construction of their project when they don’t have the capital on hand. 

Multifamily construction loans can be a great investment, depending on your specific needs. Remember that multifamily construction loans often have a lengthy application process and high approval fees. That said, they also present a high LTV allowance and they’re nonrecourse loans.

You can secure a multifamily construction loan from a variety of places, including the HUD, banks, Fannie Mae, and more. 

How to know if a Multifamily Construction Loan is right for you

Multifamily construction loans can be a great way to finance the construction of your apartment complex, especially if you combine resources with partners. 

That said, multifamily construction loans aren’t without their downsides: a lengthy application process, paperwork and documentation, and expensive approval fees. 

However, many developers choose to go with multifamily construction loans because of their benefits: high LTV allowance, 40-year term, and nonrecourse. 

Securing a multifamily construction loan from the HUD or a bank can take time and effort. That said, very few other loan options offer similar interest rates, long loan terms, high LTV allowances, and other features. 

Multifamily construction loans are consistently a great option for many developers looking to finance their next project.

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