Bank vs. Credit Union Multifamily Loans: Which Is Best?
Weighing the pros and cons of getting an apartment building loan through a bank or credit union? Check out the differences here.
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.
Banks | Credit Unions | |
|---|---|---|
Interest Rates | Generally higher | Typically lower |
Term Length | Sometimes shorter | Often longer with greater amortization |
Leverage | Maximum of around 75% | Maximum of around 75% |
Loan Size | Often larger, depending on bank size and focus. | Usually smaller, though large credit unions may be willing to work with larger loans. |
Prepayment Penalties | Generally present to ensure profitability | Often present but more likely to be negotiable |
Fees | Higher | Lower |
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.
3. Leverage
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.
6. Fees
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.
Related Questions
What are the differences between bank and credit union multifamily loans?
The key differences between bank and credit union multifamily loans include loan size and types of financing. Generally, there is not a significant difference in loan size between a multifamily loan from a bank compared to one from a credit union. However, for investors seeking a large financing package in the tens of millions of dollars, regional and national banks may be the most likely choice, as a local credit union may not be able or willing to extend such a large amount of debt. Banks typically offer significantly more multifamily loan options than credit unions, as they have a larger size and broader presence. 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.
Source: Bank vs. Credit Union Multifamily Loans: Which Is Best?
What are the advantages and disadvantages of bank multifamily loans?
The advantages of bank multifamily loans include the ability to do smaller loan amounts, the ability to finance troubled assets as long as the borrower has strong supporting financials, faster close than agency, and more flexible loan terms.
The disadvantages of bank multifamily loans include occasionally more rigid down payment, income verification and credit score requirements, sometimes requires some sort of recourse for borrower, often shorter amortizations and shorter fixed periods than CMBS and agency loans, and stricter with cash out refinances.
What are the advantages and disadvantages of credit union multifamily loans?
The advantages of credit union multifamily loans include lower interest rates, more flexible terms, and more personalized service. Credit unions are also 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. The main disadvantage of credit union multifamily loans is that they typically offer fewer loan options than banks, so if your financing needs are more complicated, banks may be the better option.
Source: Bank vs. Credit Union Multifamily Loans: Which Is Best?
What are the eligibility requirements for bank multifamily loans?
To qualify for bank multifamily loans, borrowers must typically have good credit (typically a 660-680 minimum FICO score), and a net worth of at least 100% of the loan amount, not including retirement accounts. They should also have liquidity of at least 10% of the total loan amount. Additionally, lenders and banks like to see borrowers with some type of multifamily ownership or management experience.
For more information, please see this guide and this article.
What are the eligibility requirements for credit union multifamily loans?
To qualify for a credit union multifamily loan, borrowers must typically meet certain qualifications, including a minimum credit score of 620 or higher. However, there are loan options available for borrowers with lower credit scores. Additionally, borrowers must typically meet other qualifications, such as having a good debt-to-income ratio, a good rental history, and a good history of managing their finances.
For more information, please visit Multifamily Financing: Your Comprehensive Guide.
What are the best strategies for obtaining a bank or credit union multifamily loan?
The best strategies for obtaining a bank or credit union multifamily loan depend on your specific needs. If you're looking for the lowest interest rate and fees, a credit union is likely the best choice. However, if you're looking for a larger loan or some non-standard financing options, a regional or national bank could be the better option.
To make sure you get the best loan for your needs, it's best to work with a commercial real estate financing advisor. They can help you compare loan products from different lenders and find the best option for you.
For more information, check out this article from Multifamily.Loans which compares bank and credit union multifamily loans. You can also fill out this form to get matched with your best lending options.