Tap to get financing
Multifamily Loans
Property Types
MultifamilyHealth Care & Senior LivingStudent HousingAffordable HousingMobile Home ParkOffice, Retail & More
Loan Options
Fannie MaeFreddie MacConstruction LoansLoans Under $1MFreddie Mac SBLFHA/HUD Multifamily LoansForeign National LoansCMBSBank LoansLife CompaniesBridge LoansHard MoneySoft MoneyMezzanine FinancingCrowdfundingSBA 504 LoansMezzanine Construction LoansUSDA 538 LoansFix and Flip LoansFractured Condo LoansDSCR LoansRefinance
Resources
BlogLoan DocsForms and TemplatesRatesLingoVideo LibraryMultifamily For SaleCommercial MortgagesFrequently Asked QuestionsBeginner's Guide
Calculators
Multifamily Mortgage CalculatorCap Rate CalculatorNOI CalculatorDSCR CalculatorLTV CalculatorDebt Yield CalculatorCash on Cash Return CalculatorYield Maintenance CalculatorIRR Calculator
About
About UsLeadershipTeamContactAffiliate Program (Coming Soon)We're Hiring
Get financing
Newly Published
Mar 24 at Multifamily Loans
The Best 3 Multifamily Loans for Affordable Housing in 2023
Mar 20 at Multifamily Loans
Multifamily Minute Reader Reflections: How Will Bank Failures Impact Multifamily?
Mar 14 at Multifamily Loans
Multifamily Minute Reader Reflections: How Big Are We Buying?
Explore the Janover Network
Mar 17 at Commercial Real Estate Loans
Top 10 Commercial Real Estate Lenders of 2023
Mar 15 at Commercial Real Estate Loans
Top 4 Refinancing Loans for Industrial Real Estate in 2023
Feb 20 at Commercial Real Estate Loans
How to Set Rent Rates for Your Commercial Property in 2023
Was This Article Helpful?
Multifamily Finance Blog
Last updated on Feb 19, 2023
13 min read
by Jeff Hamann

What Is Multifamily Finance? A Beginner's Guide

Read our comprehensive guide to find out what you need to know as an apartment investor to get the best out of your multifamily loan.

Better Financing Starts with More Options Start Your Application and Unlock the Power of Choice. Click Here to Get Quotes →$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
In this article:
  1. What Is Multifamily Finance? 
  2. What Kinds of Multifamily Loans Are Available?
  3. Multifamily Financing by Term Length
  4. Permanent Loans
  5. Short-Term Financing
  6. Multifamily Financing by Purpose
  7. Acquisition Loans
  8. Refinancing Loans
  9. Construction Loans
  10. Bridge Loans
  11. CMBS Loans
  12. Rehabilitation Loans
  13. Mezzanine Loans
  14. Characteristics of Multifamily Loans 
  15. Loan Amount
  16. Loan-to-Value Calculator
  17. Loan Term
  18. Amortization
  19. Multifamily Mortgage Calculator
  20. Interest Rates
  21. Current Interest Rates
  22. Prepayment Penalties
  23. Step-Down Prepayment Penalty
  24. Yield Maintenance
  25. Yield Maintenance Calculator
  26. Defeasance
  27. Loan Fees
  28. Advantages and Disadvantages of Multifamily Loans
  29. Pros of Multifamily Financing
  30. Cons of Multifamily Financing
  31. Qualifying for a Multifamily Loan
  32. Credit History
  33. Income
  34. Collateral
  35. Conclusion
  36. Related Questions
  37. Get Financing

Multifamily loans are financing options that are available to real estate investors who wish to expand their portfolio beyond single-family properties. Multifamily loans are provided by a variety of institutions, including banks, credit unions, other commercial lenders, and private investors.

Multifamily loans are a great way for investors to finance the purchase, refinancing, development, or rehabilitation of a multifamily property. In this guide, we’ll explain the basics of multifamily loans, the features and advantages, and the process of applying for a loan. 

What Is Multifamily Finance? 

A multifamily loan is a financing tool used for the acquisition, refinance, construction, or rehabilitation of a multifamily property. A multifamily building is literally any property where there are two or more residential units, but many multifamily loans are restricted to those assets with five or more units.

A multifamily loan is typically secured by a lien on the property, and the loan may also include additional security such as personal guarantees. The term of the loan can be anywhere from six months to 40 or more years. They aren't always straightforward, and loans can be very different from lender to lender — and from borrower to borrower.

What Kinds of Multifamily Loans Are Available?

There are many types of multifamily loans available, and these loans can be categorized by type or by the specific purpose for the loan. Depending on your situation, some of the financing types listed below may be a good fit, but many will not be. 

It’s important to understand them regardless, however, because as your real estate investment strategy expands or is tested, the type of loan you may need could change.

Multifamily Financing by Term Length

Permanent Loans

Permanent loans are often used to purchase or refinance a multifamily property. They are typically amortized over a period of 20 to 30 years and can come with either floating or fixed interest rates. Agency loans — think Fannie Mae and Freddie Mac loans — are generally permanent financing options, as are CMBS loans, HUD financing, and longer-term bank, credit union, or life company loans.

Short-Term Financing

There are a few different short-term financing options available for multifamily properties and developments. Short-term loans typically are more expensive, with higher interest rates and fees, but they also play a unique and important role in the acquisition or development of a property. Most of these loans have terms ranging between six months and two years.

Multifamily Financing by Purpose

Regardless of a loan’s term length, we can also classify multifamily loans by what they’re used for. This is one of the most useful ways to categorize financing types, as you probably already know what you need the financing for.

Acquisition Loans

Acquisition loans are used for the purchase of a multifamily property. These can be longer-term, permanent financing packages, but short-term bridge loans are also very common for purchasing a property. 

If you are acquiring a property to flip it, for example, a bridge loan may be your best option. Same goes if you are purchasing a newly delivered multifamily community that isn’t yet fully leased. Permanent financing can be difficult to obtain when the asset is in a relatively unstable stage of its life.

Refinancing Loans

Refinancing loans are used to refinance existing debt on a multifamily property. There are several reasons why an investor would choose to refinance. 

First, they may do so to take advantage of better rates. If you took variable-rate financing and interest rates have started to rise, refinancing may make a great deal of sense so you can lock in a fixed rate, hedging against future increases. Similarly, when rates are falling, you may be best served by refinancing to secure a lower interest rate.

Second, a borrower’s property may have significantly changed since the first loan closed. Imagine acquiring a property with an occupancy rate of 50%. Most lenders probably wouldn’t have given you the best terms. After leasing up the rest of the community — and keeping a higher occupancy for a period of time — you will likely be able to get significantly better financing terms, given the performance and stability of the asset.

Third, your existing loan may just be about to mature. If you don’t have a fully amortizing loan, that means you will likely owe a balloon payment — essentially, the remaining principal of the loan — at the end of the term. Because most investors don’t have that kind of cash on hand, it often makes more sense to refinance instead.

Construction Loans

As you might expect, construction loans are used to finance the construction of a multifamily property. They typically have a term of six months to two years, and they are typically interest-only loans. 

That said, not all construction loans have short terms. Consider the Department of Housing and Urban Development’s HUD 221(d)(4) multifamily construction financing. This loan offers terms of up to 43 years at a fixed interest rate, making it an incredibly popular option for apartment developers.

Bridge Loans

Bridge loans are short-term loans used to “bridge the gap” between the purchase of a property and the closing of a permanent loan. They typically have a term of six to 12 months, and they’re often interest-only.

These loans are particularly useful when you need to quickly close a loan for an acquisition. Most bridge financing packages offer short funding timelines, and they can be ideal when you’re waiting for more advantageous financing — say, a HUD multifamily loan — to deliver. Bridge loans are more expensive than most other financing types, but they are incredibly useful tools to have in your multifamily finance toolkit.

CMBS Loans

Also known as conduit loans, a CMBS loan is a type of financing that is pooled with similar loans into securities, then acquired by investors on the secondary market. This type of loan can be particularly advantageous for borrowers with less-than-ideal credit with a strong property: Lenders tend not to scrutinize a borrower as much as the income-producing property.

Rehabilitation Loans

If you own a property that needs some upgrades, a rehabilitation loan may be exactly what you’re after. This type of loan provides an investor with capital to renovate an existing apartment building or community. Many of these loans have a term similar to construction financing, but they are often less costly to service. Some are longer term, however: Take Fannie Mae’s Moderate Rehabilitation Loan, for example, which can have terms between five and 30 years.

Mezzanine Loans

Mezzanine loans are used to finance a multifamily property at higher leverage than a traditional loan. They aren’t used on their own, rather they “top up” the amount of leverage you can get on a property.

For example, let’s say you have a $2 million loan on an apartment building valued at $3 million, or a loan-to-value ratio of about 67%. If you’re seeking higher leverage and turn to a mezzanine lender, perhaps you could get an additional loan of $400,000. That would bring your LTV ratio to 80%, which could provide you with a better return.

Characteristics of Multifamily Loans 

With so many different kinds of multifamily financing out there, it’s also important to familiarize yourself with the loan characteristics you will see, so you can compare similar financing options to make your best choice.

Multifamily loans, regardless of term length or purpose, will have the following characteristics.

Loan Amount

Of course, every loan has an amount. However, different types of financing will be able to provide you with capital at different loan-to-value or loan-to-cost ratios. If you are seeking to maximize your leverage, it makes sense to aim as high as you can.

Most multifamily loans offer financing at an LTV of up to 75%, but some financing types can go significantly higher.

Loan-to-Value Calculator

Curious what your loan amount translates into, in terms of LTV? Enter your figures into the calculator below.

Loan Term

Multifamily loan terms vary widely. Construction loans, as previously mentioned, usually go up to two years, while longer-term permanent loans may extend for 30 years or more. Many agency loans have terms of around five to 10 years, though amortization periods are generally far longer.

Amortization

A loan’s amortization period is the schedule of payments to fully pay off a loan. This isn’t the same as the loan’s term, unless the loan is fully amortizing. Think of it in terms of a home loan: If you have a fully amortizing, 30-year mortgage on your house, once 30 years have passed, you’ve paid off the loan.

Now, imagine that you keep those same payments, but the loan’s term is only 10 years. This would be a partially amortizing loan with an amortization of 30 years. Of course, in the case of partial amortization, the loan won’t be paid off at the end of the term. Instead, you would have to pay a balloon payment to cover the remaining principal and interest remaining.

Multifamily Mortgage Calculator

Curious about what your balloon payment might be with a partially amortizing loan? Use our multifamily loan calculator below.

Interest Rates

You’re likely familiar with what interest rates are, but it’s important to consider any differences in rates you’re quoted. After all, even a slightly different fixed or floating rate could have a sizeable impact both in monthly debt servicing costs and for any end-of-term balloon payment.

If you are comparing a fixed-rate to a variable-rate loan, pay close attention to economic conditions. A loan with a variable interest rate may make more sense as interest rates are declining, but if rates are on the rise, tread carefully.

Current Interest Rates

Below, you'll see the current rates of several important indexes, updated daily. Note that these are not the rates you would receive on a loan, but many loans have interest rates tied to one of these rates.

Prepayment Penalties

Prepayment penalties are pretty common for multifamily loans. These stipulations ensure that lenders are able to receive their earnings from interest payments that have been projected during a loan’s term. Generally, if a borrower pays a loan off ahead of schedule, they will need to pay an additional fee or provide an additional source of revenue to the lender.

Step-Down Prepayment Penalty

The most common prepayment penalty is a step-down penalty. Also called a graduated or declining prepayment penalty, this type imposes a penalty fee equal to a percent of the outstanding balance, with the percentage declining over time. An example is a 5-4-3-2-1 step-down, which essentially means that, should a borrower pay the loan off in the first year, they would need to pay an additional 5% of the outstanding balance to the lender, followed by 4% if paid off in the second year, and so on. After the fifth year in this example, where the fee is 1%, there is no penalty.

Yield Maintenance

Another common penalty is yield maintenance, which is often found in Fannie Mae or Freddie Mac multifamily loans. It is generally calculated by taking the remaining loan payments and multiplying them by the difference between the loan’s interest rate and the Treasury rate with a similar term.

Yield Maintenance Calculator

It may be easier to illustrate yield maintenance with a calculation than with walls of text. Go ahead and put in some values below to determine the cost of yield maintenance.

Defeasance

Defeasance is, hands down, the most difficult prepayment penalty to work with. Common in CMBS loans, defeasance requires the substitution of income-producing collateral if the borrower chooses to pay a loan off early. This often means that an investor will purchase an equivalent amount of U.S. Treasury securities to substitute for the collateral property. It’s expensive and very complicated, often requiring a team of legal experts to handle properly.

Loan Fees

Loan fees, including anything from closing costs to origination fees and appraisal fees, are a part of every financing option out there. These fees differ by the instrument used, but they can add up to quite a bit if you’re unprepared. Also be sure to note any application fees.

Some fees are a longer-term part of a financing package, too. Consider HUD multifamily loans and their mortgage insurance premium, or MIP. While a borrower must typically pay an upfront MIP equal to a percent of the loan amount, these are often paid annually at a smaller amount, as well.

Advantages and Disadvantages of Multifamily Loans

There are pros and cons of taking out a multifamily loan compared to loans on other types of commercial real estate. Let’s take a look at a few.

Pros of Multifamily Financing

  • Better Interest Rates: Due to lower risk in the multifamily property sector, loans typically come with lower interest rates than similarly valued properties in other commercial real estate sectors.

  • Longer Terms: Although many multifamily loans are limited to between five and 10 years, some financing types, like HUD loans, offer fully amortizing, long-term options.

  • Flexible Terms: Due to the wide range of options available, borrowers can often find the terms they’re looking for by shopping around.

  • Higher Leverage: Multifamily financing typically allows for higher LTV ratios than loans for other commercial real estate assets, like office and industrial buildings.

Cons of Multifamily Financing

  • Prepayment Penalties: If your multifamily loan has a prepayment penalty, it can be significant.

  • Required Reserves: Some types of apartment loans require the borrower to keep a certain amount of cash reserved for necessary property repairs. While this is something any apartment investor should be doing, required reserves can limit an investor’s flexibility. Note that all HUD loans require reserves.

Qualifying for a Multifamily Loan

Borrowers must meet specific criteria to take a multifamily loan in most cases. While there are some loan types that scrutinize a borrower less closely — CMBS and hard money loans, for example — most lenders will expect you to demonstrate the following items.

Credit History

Most lenders have a preferred credit rating for their borrowers. Showing a good credit score indicates you are a reliable borrower who will make loan payments on time for the duration of the loan term.

Income

Lenders will look at the borrower’s property income as well as any other sources of income, in many cases. If your income does not exceed the debt servicing costs by a significant margin, expect to pay higher fees and rates to cover the additional risk the lender is taking on.

Collateral

For most first-time multifamily borrowers, a lender will want to see significant collateral to secure the loan. This may include putting up your personal property or other assets as collateral in the event of a default.

Note that more experienced borrowers, and borrowers utilizing certain types of financing programs, like Fannie Mae, Freddie Mac, or CMBS loans, may be able to get a non-recourse loan. Non-recourse loans use only the financed property as collateral. This means if the loan goes into default, the lender may only repossess the multifamily property to cover its losses. Non-recourse financing does tend to come with higher costs, however, due to the increased risk for the lender.

Conclusion

After reading our guide, you should have a solid grasp about what multifamily finance is, and how you can leverage it to make your apartment investment a successful one.

The advantages of multifamily loans make them an attractive option for investors who are looking to purchase, refinance, or rehabilitate a multifamily property. Multifamily loans are typically available with lower interest rates than other types of loans, and they are typically available with longer terms. Furthermore, multifamily loans are typically secured by the value of the property, which gives borrowers the peace of mind that their investment is secure.

Need some additional assistance? Complete the form below and we’ll walk you through your options — and provide you with some free quotes along the way. 

Related Questions

What are the different types of multifamily financing?

When it comes to multifamily finance, there are several options available to investors. These include:

  • Conventional Loans
  • FHA Loans
  • Bridge Loans
  • CMBS Loans
  • Mezzanine Financing
  • Preferred Equity
  • Joint Venture Equity
  • Construction Loans
  • HUD Loans

For more information on each type of loan, please visit Multifamily Financing: Your Comprehensive Guide.

What are the benefits of multifamily financing?

The benefits of multifamily financing include better interest rates, longer terms, flexible terms, and higher leverage.

Due to lower risk in the multifamily property sector, loans typically come with lower interest rates than similarly valued properties in other commercial real estate sectors. Banks consider it a less risky investment. Although many multifamily loans are limited to between five and 10 years, some financing types, like HUD loans, offer fully amortizing, long-term options. Due to the wide range of options available, borrowers can often find the terms they’re looking for by shopping around. Multifamily financing typically allows for higher LTV ratios than loans for other commercial real estate assets, like office and industrial buildings.

What are the requirements for multifamily financing?

To qualify for multifamily financing, borrowers must typically meet certain qualifications, including having a good credit score, a sufficient amount of liquid assets, and a debt-to-income ratio that is within the lender's guidelines. The condition of the property being financed will also be taken into account, as lenders will want to ensure that the property is in good condition and is likely to generate enough income to support the loan.

For more information, please visit Multifamily Financing: Your Comprehensive Guide.

What are the risks associated with multifamily financing?

The risks associated with multifamily financing include prepayment penalties and required reserves. Prepayment penalties can be significant and some types of apartment loans require the borrower to keep a certain amount of cash reserved for necessary property repairs. This can limit an investor’s flexibility. Note that all HUD loans require reserves. Source 1 and Source 2.

What are the different types of multifamily loan products?

The different types of multifamily loan products include conventional loans, FHA loans, bridge loans, mezzanine loans, and CMBS loans. Conventional loans are typically offered by banks and other financial institutions, and are often used to purchase or refinance existing properties. FHA loans are insured by the Federal Housing Administration and are typically used to finance the purchase of multifamily properties. Bridge loans are short-term loans used to bridge the gap between the purchase of a property and the permanent financing. Mezzanine loans are a type of financing that is used to finance the purchase of a property when the borrower does not have enough equity to qualify for a traditional loan. CMBS loans are commercial mortgage-backed securities loans that are used to finance the purchase of a multifamily property.

For more information, please see Multifamily Financing: Your Comprehensive Guide and What Is Multifamily Finance? A Beginner's Guide.

What are the current trends in multifamily financing?

According to Freddie Mac®’s predictions, multifamily origination volume is estimated to expand to $317 billion in 2019, a nearly 4% increase from the approximate $305 billion of multifamily financing originated in 2018. Factors that can be attributed to this trend include consistent investor demand for apartment properties, as well as other market forces, including a strong economy, reasonable job growth, and low interest rates.

It's unsurprising that the majority of respondents — more than 60% — pointed to rising interest rates. After all, the current federal funds rate of 4.25% to 4.5% is in stark contrast to the same time last year, when rates ranged between 0.0% and 0.25%.

Tighter underwriting standards are also a factor, which involves the standards lenders set for debt service coverage ratios, loan-to-value ratios, and more.

In this article:
  1. What Is Multifamily Finance? 
  2. What Kinds of Multifamily Loans Are Available?
  3. Multifamily Financing by Term Length
  4. Permanent Loans
  5. Short-Term Financing
  6. Multifamily Financing by Purpose
  7. Acquisition Loans
  8. Refinancing Loans
  9. Construction Loans
  10. Bridge Loans
  11. CMBS Loans
  12. Rehabilitation Loans
  13. Mezzanine Loans
  14. Characteristics of Multifamily Loans 
  15. Loan Amount
  16. Loan-to-Value Calculator
  17. Loan Term
  18. Amortization
  19. Multifamily Mortgage Calculator
  20. Interest Rates
  21. Current Interest Rates
  22. Prepayment Penalties
  23. Step-Down Prepayment Penalty
  24. Yield Maintenance
  25. Yield Maintenance Calculator
  26. Defeasance
  27. Loan Fees
  28. Advantages and Disadvantages of Multifamily Loans
  29. Pros of Multifamily Financing
  30. Cons of Multifamily Financing
  31. Qualifying for a Multifamily Loan
  32. Credit History
  33. Income
  34. Collateral
  35. Conclusion
  36. Related questions
  37. Get Financing

Getting commercial property financing should be easy.⁠ Now it is.

Click below for a free, no obligation quote and to learn more about your loan options.

Get financing →
Janover logo

Multifamily Loans is a Janover company. Please visit some of our family of sites at: Multifamily Loans, Multifamily Today, Commercial Real Estate Loans, SBA7a Loans, CMBS Loans, Apartment Loans, HUD Loans, HUD 221d4 Loan, HUD 232 Loan, HUD 223f Loan, HUD 223a7 Loan, SBA Express Loans, SBA 504 Loans, and OpportunityZones Help.

Janover Inc.

6401 Congress Ave
Ste 250
Boca Raton FL 33487

hello@multifamily.loans

Multifamily Loans

Beginner's Guide
Multifamily Refinance
Multifamily Mortgage Calculator
Current Rates
Commercial Mortgage Calculator

Site Information

Privacy Policy
Terms of Use

This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We have no affiliation with any government agency and are not a lender. We are a technology company that uses software and experience to bring lenders and borrowers together. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. We use cookies to provide you with a great experience and to help our website run effectively.

Freddie Mac® and Optigo® are registered trademarks of Freddie Mac. Fannie Mae® is a registered trademark of Fannie Mae. We are not affiliated with the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Freddie Mac or Fannie Mae.

Copyright © 2022 Janover Inc. All rights reserved.