Multifamily finance is a critical aspect of apartment investing. In this guide, we'll provide a detailed overview of multifamily finance, including the different types of financing available, the qualifications required to obtain financing, and the key considerations to keep in mind when applying for a loan.

Types of Multifamily Financing

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

Conventional Loans

Conventional loans are the most common type of multifamily financing. They are typically offered by banks and other financial institutions, and are often used to purchase or refinance existing properties. Conventional loans may be offered at a fixed or floating interest rate, and they often require a substantial down payment and a good credit score.

FHA or HUD Multifamily Loans

HUD multifamily loans are some of the most competitive types of financing out there. They carry very long loan terms — some even beyond 40 years — and are fully amortizing with a fixed interest rate for the life of the loan.

These loans are insured by the government to make it easier for borrowers to access financing. They are not exclusively for affordable housing, though properties reserving units for lower-income renters will generally get better loan terms. Leverage for these loans can go up to 87% — even higher in some situations.

The main drawback of a HUD loan is in its timing. A HUD multifamily loan can take more than six months to close. However, if you have the ability to wait for your financing, they can offer a compelling benefit to any multifamily property’s bottom line.

There are many different kinds of HUD multifamily financing, with several described below.

HUD 223(f) Loans

The HUD 223(f) loan is specifically designed to finance the acquisition or refinancing of existing multifamily properties. Loan terms are typically far more favorable than conventional loans, with fully amortizing terms of up to 35 years. The HUD 223(f) loan program also allows for more flexible underwriting guidelines and lower mortgage insurance premium than other government-insured loan programs. These loans can be used for both market-rate and affordable housing properties, making it a great option for a wide range of investors.

HUD 221(d)(4) Loans

The HUD 221(d)(4) loan program is a government-insured loan program specifically designed to finance the construction or rehabilitation of multifamily properties. These loans typically have a lower, fixed interest rate than conventional construction loans, and can be used to finance both new construction and substantial rehabilitation. They boast some of the most competive terms out there, with terms exceeding 40 years at a high loan-to-cost ratio.

HUD 223(a)(7) Loans

If you’ve already got a HUD multifamily loan, the HUD 223(a)(7) program should be your first stop when seeking a refinance. This type of financing can be very beneficial if rates drop below your existing loan, and loans typically close much, much faster than other HUD financing types. One major constraint for this loan product is that it can only be used for existing HUD borrowers.

Fannie Mae and Freddie Mac Loans

Fannie Mae and Freddie Mac are government-sponsored enterprises that provide financing for multifamily properties. There are multiple types of loans available through these GSEs, and they are typically offered at a lower interest rate than conventional loans, often with more flexible underwriting guidelines.

Construction Loans

Multifamily construction loans are designed to finance the costs associated with building or renovating a multifamily property and are typically offered by banks, credit unions, and other financial institutions. That said, Fannie Mae and Freddie Mac loans are available for significant renovation work, and HUD’s 221(d)(4) financing offers some of the most competitive ground-up construction financing in the industry.

Construction loans typically have different terms and qualifications than permanent loans. They are usually short-term loans, usually with a term of 12 to 36 months and a variable interest rate and interest-only payments during the construction period. Borrowers typically need to provide a detailed construction budget and schedule and have a general contractor in place before they can obtain construction financing.

Construction loans can be a great option for investors looking to build or renovate a multifamily property, but it's important to keep in mind that they can be more complex and require far more detailed planning and budgeting.

It's also important to consider the market conditions and the projected rental income of the property to ensure that the property will generate enough income to support the loan and the construction costs. Keep in mind that during construction and even larger renovation work, you will not be earning significant (if any) revenue from the building.

CMBS Loans

CMBS, or commercial mortgage-backed securities, loans are a type of multifamily financing that, once issued, gets traded with a pool of other commercial mortgages on the secondary market. Although rates can be higher with CMBS loans — and prepayment penalties can be severe — one main benefit of this financing vehicle is that lenders tend not to scrutinize a borrower as carefully as the property itself. If you don’t have perfect credit, a CMBS loan may be a good option for financing your multifamily deal.

Bridge Loans

Bridge loans are so named because they help a borrower “bridge” the gap between the purchase or construction of a property and the availability of longer-term, permanent financing. Bridge loans generally have terms between one and two years.

Bridge financing can be a great option for investors looking to quickly acquire a property or make improvements to a property, but it's important to keep in mind that they typically have higher interest rates and fees than traditional loans. Because of their short terms, it's essential to have a plan in place to either refinance or sell the property before the loan matures. It's also important to consider if the projected rental income of the property will be enough to support the loan payments in the meantime.

Hard Money Loans

Similar in many ways to bridge loans, hard money loans are typically provided by private investors or specialized lending companies, rather than traditional banks or financial institutions. They are often used as a short-term financing solution for the acquisition or renovation of a property, and typically have a higher interest rate than traditional loans, along with potentially higher fees.

Hard money loans can be a good option for investors who are unable to qualify for traditional financing or for those who need to close on a property quickly. They are typically based on the value of the property rather than the borrower's credit score or income and can be approved and funded in a matter of days. However, it's important to keep in mind that hard money loans typically have shorter loan terms and more strict terms and conditions than traditional loans. Additionally, it's also important to consider your exit strategy, as hard money loans typically require full repayment within a year to 18 months.

Qualifications for Multifamily Financing

To qualify for multifamily financing, borrowers must typically meet certain qualifications, including those below.

Minimum Credit Score

Many lenders require a minimum credit score of 620 or higher to qualify for multifamily financing. However, this is not a hard requirement — many loan options exist for borrowers with lower credit scores.

Minimum Down Payment

Conventional loans typically require a down payment of 20% or more, though several loan products, from HUD financing to Fannie and Freddie loans, allow for significantly higher leverage.

Income and Debt Ratios

Lenders will also consider the borrower's income and debt ratios to determine their ability to repay the loan.

Property Condition

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.

Key Considerations for Multifamily Financing

When applying for multifamily financing, there are several key considerations to keep in mind, including:

Loan Amount

Of course, you'll need to consider how much money you will require for financing your multifamily property. All loan products typically limit the amount of the loan by either the loan-to-value ratio or the debt service coverage ratio.

Loan-to-Value

A loan-to-value ratio (also known as an LTV) is simply the amount of financing compared to the total value of the property. Different loan types allow for higher LTVs than others. Use our calculator below to calculate your LTV ratio.

Debt Service Coverage Ratio

A debt service coverage ratio, or DSCR, measures a multifamily property's cash flows compared to its debt obligations. It is an essential metric lenders use to assess the risk of a specific loan. Use our calculator to find your DSCR.

Interest Rate

The interest rate on the loan will have a significant impact on the total cost of the loan, so it's important to shop around and compare rates from different lenders.

Current Rates

You can find today’s interest rate indexes below. While the federal funds rate is not commonly used to anchor a loan’s interest rate, the Secured Overnight Financing Rate (SOFR) and the Treasury rate are.

Loan Terms

The loan terms, such as the length of the loan and the amortization schedule, will also affect the total cost of the loan.

Prepayment Penalties

Some loans may have a prepayment penalty, which can be costly if the borrower decides to pay off or refinance the loan early.

Closing Costs

Closing costs can also add significantly to the overall cost of the loan, so it's important to factor these into the overall cost of the loan.

Property Location

The location of the property can also affect the financing options available and the terms of the loan. Properties in certain areas may be eligible for certain programs or incentives.

Recourse

A recourse loan means that the lender has the right to pursue the borrower's personal assets in the event of default. Non-recourse loans, on the other hand, limit the lender's ability to pursue the borrower's personal assets. Instead, the lender can only go after the collateral, the property.

Many multifamily loans are recourse loans, but some lenders may offer non-recourse loans for certain types of properties or for more experienced borrowers. Typially, non-recourse loans come with higher expenses to offset the increased risk to the lender.

Property Type

The type of property being financed will also play a role in the financing options available. For example, luxury communities with high-end amenities may be more attractive to lenders and thus have more favorable loan terms.

Calculating the Cost of Your Multifamily Loan

If you have a general idea of what financing terms you’ll receive, input them into our calculator below to determine your monthly payments and, if applicable, any balloon payment due at maturity.

Conclusion

Multifamily finance is a complex and multifaceted topic, but by understanding the different types of financing available, the qualifications required, and the key considerations to keep in mind when applying for a loan, investors can make informed decisions when it comes to financing their multifamily properties.

There are many types of multifamily financing available to investors, and each one has its own unique set of qualifications, terms and conditions. It's important to consider all options and speak with a multifamily financing expert to determine which type of loan is best suited for your specific needs. In the end, the most important thing is to be well informed and make the best decision for your investment and financial situation.

If you aren’t sure what type of financing or what loan terms work best for your unique deal, get quotes from us by filling in your details below.