You've found the perfect property for your multifamily investment, and now you need to secure financing. But what type of lender offers the best loan for your needs?
Let’s say you’ve got a credit union or a bank in mind for your next loan. Banks and credit unions are both popular choices for multifamily loans, but there are some key differences between the two that you should be aware of before you make a decision on your financing.
What's the Difference Between a Bank and a Credit Union?
Banks are for-profit institutions that are owned by shareholders. They're regulated by the federal government, which means they're subject to stricter rules and regulations than credit unions. Their deposits are insured by the Federal Deposit Insurance Corporation, or FDIC.
Credit unions, on the other hand, are not-for-profit organizations that are owned by their members. They're regulated and insured by the National Credit Union Administration, or NCUA.
Credit unions tend to be more local than banks, and they also generally offer lower interest rates and lower fees. While small, independent banks do exist, the vast majority are either regional, national, or international — or affiliated with a larger network of banks.
Key Differences Between Bank and Credit Union Multifamily Loans
Now that you know the basics of how banks and credit unions operate, let's take a look at some of the key differences between their multifamily loans.
Often longer with greater amortization
Maximum of around 75%
Maximum of around 75%
Often larger, depending on bank size and focus.
Usually smaller, though large credit unions may be willing to work with larger loans.
Generally present to ensure profitability
Often present but more likely to be negotiable
Types of Financing
A wide range of multifamily financing instruments
Often limited to standard permanent loans or specific niche types
1. Interest Rates
Interest rates on bank loans are typically higher than credit union loans. That's because banks are for-profit institutions and need to earn a profit on their loans. Credit unions, as not-for-profit organizations, can generally offer lower interest rates.
2. Loan Terms
Loan terms for bank loans are sometimes shorter than credit union loans. That's because banks often re-sell loans on the secondary market, where loan terms of 10 years or less are more common. Credit unions, on the other hand, are more likely to hold onto the loans for the life of the loan, and they may even offer fully amortizing loans.
The leverage permitted by banks and credit unions is broadly similar. That said, occasionally LTV requirements for bank multifamily loans are higher than credit union financing, because banks are broadly more risk averse than credit unions. Credit unions are more likely to accept a higher loan-to-value ratio because they don’t operate for profit and can thus tolerate more risk in their lending activity.
4. Loan Size
There’s generally not a significant difference in loan size between a multifamily loan from a bank compared to one from a credit union. That said, for investors seeking a large financing package in the tens of millions of dollars, regional and national banks may be your most likely choice, as a local credit union may not be able or willing to extend such a large amount of debt.
5. Prepayment Penalty
The prepayment penalty requirements for bank loans are typically higher and more strict than for credit union loans. That's because banks want to make sure they get paid for the full term of the loan. Expect a step-down penalty, if not yield maintenance for a larger amount. Credit unions, on the other hand, are more likely to waive or offer a reduced prepayment penalty, as they are broadly more member focused.
The fees for bank loans are typically higher than credit union loans. That's because banks are for-profit institutions and need to make a profit on their loans. Credit unions are not-for-profit organizations, so they can offer lower fees.
7. Types of Financing
Banks, due to their larger size and broader presence, typically offer significantly more multifamily loan options than credit unions. If your financing needs are relatively standard, or it fits within a credit union’s niche, then a credit union may have you covered. But for more complicated financing situations, banks typically offer more choices and solutions.
Which Is Best for You?
Now that you know the key differences between bank and credit union multifamily loans, you can decide which type of lender is best for your needs. If you're looking for the lowest interest rate and fees, a credit union is probably the best choice. But if you're looking for a larger loan, or some non-standard financing options, a regional or national bank could best meet your needs.
Want to take the guesswork out of the game, though? Fill in the form below, and we’ll match you with your best lending options — regardless of if it’s through a bank, a credit union, a life company, or even a CMBS lender.