Getting a Multifamily Loan

When you get into multifamily real estate financing, your financing options become much more limited than those for single-family homes or duplexes. Buildings with five or more units fall into commercial financing categories and often require substantial equity or reserves to qualify for loans.


Lenders consider the property and the borrower’s experience and financial profile more than personal credit to determine if an apartment building loan is appropriate.

Getting a Loan

Most homeowners think nothing of going to the local branch of a large national bank when they need a loan. That may make sense for a car, home mortgage or a personal loan, but when it comes to apartment building financing, these lenders will probably not be familiar with the process. Unlike personal loans, an apartment building mortgage is less concerned with the borrower’s credit history and more focused on what the property will earn in rent. A borrower with a very good credit score and an excellent job may not be able to get an apartment building loan if the property does not have enough income potential.

Obtaining an apartment building loan requires preparing financial projections and pledging the land that the property sits on as collateral. Lenders also generally require a borrower to establish a limited liability company (LLC) for this type of loan, which limits the owner’s liability by making it impossible for the lender to seize any other properties owned by the individual.

Apartment buildings typically qualify for blanket loan programs, which allow borrowers to use one mortgage to purchase multiple units of apartments. These loans come in standardized types that lenders can sell to Fannie Mae or Freddie Mac and customized types, known as portfolio loans, that banks keep on their balance sheets. The standardized loans have more liberal guidelines, but the pricier portfolio loans can feature high rates and fees.

Getting a Lender

Getting a loan for an apartment building is a little more complicated than securing a mortgage on a house. The process involves “a little different underwriting, a little higher qualification,” says an analyst with Wells Fargo in Orange County, California. Often, a multifamily loan requires more detailed financials and the lender may look at a borrower’s experience as an apartment owner and manager before offering them financing.

Multifamily loan lenders include banks, agencies and HUD. HUD 223(f) loans for apartment purchase are the creme de la creme of multifamily loans, offering up to 85% combined loan to value and a DSCR of 1.18x or less on market rate properties. The loans are generally favored by experienced multifamily investors and offer non-recourse terms.

Other types of multifamily loans include those offered by life companies, which can offer long term fixed rates but typically want highly experienced borrowers; conduit lenders, which can be a source for loans up to 90% LTC and that can be available to credit challenged borrowers; and hard money lenders, which offer high interest rates and are usually only accessible to highly experienced multifamily investors or those with a large amount of equity in their existing property portfolios. For larger multifamily projects, borrowers can also add a second-position multifamily mezzanine loan to increase the total combined LTC.

Getting a Rate

Once the borrower has determined a budget and a target market, it’s time to secure financing. “Securing financing is one of the most critical components to buying an apartment building,” says Barefield. Borrowers should get pre-approved by several lenders and carefully prepare all the paperwork required for the loan application, including detailed financial statements.

The loan process for an apartment building varies slightly from that of a single-family home or a condominium. It involves “a little bit different underwriting, a little bit more qualification,” Borland says. A lender also might consider a borrower’s experience as a rental property investor before approving a loan.

Many lenders offer apartment loans from a few million dollars up to multimillion-dollar properties. Loans are available with fixed or variable rates, and there are hybrid loans that start out as fixed and later reset. Typically, a lower LTV (loan-to-value) gets a better interest rate.

In determining how much to pay for an apartment complex, a borrower should be sure to take into account all the costs of operating it. This includes rental income, property taxes, utilities and insurance. Expenses should be compared to the rents being charged in the area to ensure the complex is competitive. In addition, the borrower should try to identify ways to add value. For example, if an owner can reduce expenses and increase rents, it can boost the net operating income (NOI) and make the property more attractive to buyers.

Getting a Closing

After you have an accepted offer from the seller, there are a few more steps to take before you can close on your apartment building. Your lender will run an audit of your financials including bank statements, pay stubs, W2s, tax returns and outstanding liabilities as well as conduct an appraisal to ensure that the value of the property is in line with what is being loaned for its purchase.

Your attorney will schedule your closing and do a title search to ensure that the property doesn’t have any liens. Make sure to get title insurance. It will protect you if the title company misses something.

It is important to understand that an accepted offer in NYC is not a binding contract. The seller can continue to show the property to other prospective buyers, and you could still lose out on your dream home. That is why it’s important to move quickly through the process once you have an accepted offer.

An experienced real estate lawyer can guide you through the entire process and ensure that everything is done correctly. You will also need to hire a contracting company to oversee all the repairs and renovations that are needed.