How to Get a Commercial Loan for Multifamily

A commercial multifamily loan provides specialized financing for acquiring, developing, or refinancing properties with multiple residential units, such as apartment buildings or larger residential complexes. Investors, developers, and property owners commonly pursue these loans to expand their real estate portfolios and invest in income-generating properties.

Understanding Multifamily Commercial Loan Options

Various commercial loan options exist for multifamily properties, each with distinct characteristics and uses. These options are structured to meet different investment strategies and property conditions.

Conventional bank loans

Conventional bank loans are offered by local or regional financial institutions. They feature terms from 3 to 15 years, with amortization periods up to 30 years. Lenders generally require a Loan-to-Value (LTV) ratio up to 80% and a Debt Service Coverage Ratio (DSCR) between 1.20x and 1.55x. These loans can be structured with recourse, limited recourse, or non-recourse provisions.

Agency loans

Agency loans, offered through Fannie Mae and Freddie Mac, are government-sponsored enterprise (GSE) backed financing. Used for stabilized multifamily properties, they provide competitive terms and non-recourse options. Fannie Mae loans range from $1 million to $100 million, and Freddie Mac loans from $1 million to $250 million. Both offer terms between 5 and 30 years with amortizations up to 30 years, LTVs up to 80%, and DSCRs around 1.25x. Specialized programs include Freddie Mac’s Small Balance Loans for properties with 5 to 100 units.

FHA/HUD loans

FHA/HUD loans are government-insured options with long terms and high leverage. Loans like HUD 223(f) for acquisition or refinancing, and HUD 221(d)(4) for new construction or substantial rehabilitation, feature terms up to 35-40 years. They offer LTVs up to 85-90% for market-rate or affordable properties and lower DSCR requirements, as low as 1.11x to 1.20x. While non-recourse, these loans involve an extensive application process and may require annual financial audits.

Bridge loans

Bridge loans are short-term financing, ranging from 6 months to 2 years. They have higher interest rates, from 5.34% to 14.34%, and are interest-only. Bridge loans are useful for immediate financing needs, such as quick acquisitions, funding renovations, or stabilizing cash flow before permanent financing. They have a maximum LTV up to 75% of cost, capped at 70% of completed or stabilized value.

Construction loans

Construction loans finance new development or substantial rehabilitation projects. They involve a series of draws disbursed as construction progresses. The HUD 221(d)(4) program, mentioned previously, is designed for new construction and substantial rehabilitation of multifamily properties, offering long-term, fixed-rate financing.

Commercial Mortgage-Backed Securities (CMBS) loans

Commercial Mortgage-Backed Securities (CMBS) loans are securitized loans pooled and sold to investors on the secondary market. These non-recourse loans offer fixed terms, commonly 5, 7, or 10 years, with amortizations up to 30 years. CMBS loans start at a minimum of $2 million, with LTVs up to 75% and DSCRs around 1.25x. They are considered for projects that may not fit agency lending criteria, focusing on the asset’s financial performance rather than borrower credit.

Preparing Your Loan Application

Preparing for a multifamily loan application involves compiling comprehensive financial information for both the borrower and the property. Lenders use this documentation to assess creditworthiness and investment viability. Organizing these materials streamlines the application process and can improve loan approval likelihood.

Borrower financial statements

Borrower financial statements are a primary application component. Lenders require personal financial statements detailing net worth, liquidity, and existing real estate owned schedules. This includes assets like cash, investments, and other properties, alongside liabilities such as mortgages. Tax returns for the past two to three years verify income and financial stability. A detailed credit history, including business credit, is evaluated to gauge past financial behavior.

Property financial information

Property financial information provides insight into the asset’s income-generating potential and operational history. Lenders require current rent rolls, detailing occupied units, rental rates, and lease terms. Operating statements from the past two to three years are necessary to understand historical revenue and expenses. Pro forma projections, forecasting future income and expenses, are also important, particularly for properties undergoing value-add improvements or lease-up. Details on existing leases and tenant profiles inform the lender about income stability.

Specific property information

Specific property information is essential for a comprehensive review. This documentation includes a detailed property description, recent photographs, and surveys delineating property boundaries. Environmental reports, such as a Phase I Environmental Site Assessment, are required to identify potential environmental hazards. An existing appraisal can provide an initial valuation, though lenders often commission their own. For acquisitions, a fully executed purchase agreement outlines the transaction terms.

A concise business plan or executive summary

A concise business plan or executive summary provides lenders with an overview of the investment strategy. This document should include a market analysis, outlining local economic conditions and rental market trends. It should also describe the proposed management plan and overall investment strategy, including any planned capital improvements. This summary helps lenders understand the borrower’s vision and financial objectives.

Key financial metrics

Key financial metrics are central to a lender’s evaluation. The Debt Service Coverage Ratio (DSCR) measures the property’s ability to cover debt obligations, calculated by dividing Net Operating Income (NOI) by annual debt service. Lenders seek a DSCR of at least 1.15x to 1.25x, indicating sufficient cash flow. The Loan-to-Value (LTV) ratio, calculated as the loan amount divided by the property’s appraised value, assesses the loan’s risk. A lower LTV signifies less risk for the lender, potentially resulting in more favorable loan terms.

The Multifamily Loan Application Process

After preparing all necessary documentation, the multifamily loan application process involves formal submission and a detailed review by the lending institution. This phase focuses on verification and assessment, evaluating the borrower’s financial capacity and the property’s viability.

Identifying and engaging with a suitable lender

The initial step involves identifying a suitable lender. Borrowers can work with a commercial mortgage broker, who connects clients with various lenders and loan products. Alternatively, borrowers can directly approach banks, credit unions, or other financial institutions offering multifamily commercial loans. Lender selection depends on the specific loan type and property characteristics.

Formal submission

Once a lender is identified, the formal submission of the application package occurs. This involves providing all prepared financial statements, property documents, and business plans. This submission initiates the lender’s review process.

Underwriting phase

Following submission, the loan enters the underwriting phase. The lender’s underwriting team reviews all submitted information. They analyze the borrower’s financial health, including credit history and existing assets, to determine repayment ability. Simultaneously, the property’s financial performance and projections are scrutinized to assess its income-generating potential and viability as collateral.

Third-party reports

The underwriting process involves ordering third-party reports, such as an appraisal and environmental assessments. The appraisal provides an independent valuation, ensuring the loan amount aligns with the asset’s market value. Environmental assessments, like a Phase I Environmental Site Assessment, identify potential environmental contamination or hazards.

Due diligence period

A due diligence period follows, during which the lender conducts thorough verification of all submitted information. This may involve site visits, interviews with property management, and cross-referencing financial data. The goal is to confirm the accuracy and completeness of the application, ensuring all aspects align with lender requirements.

Loan commitment letter

Upon successful completion of underwriting and due diligence, the lender issues a loan commitment letter. This document outlines the specific terms of the loan, including the approved loan amount, interest rate, amortization schedule, and any conditions precedent to closing. It serves as a binding agreement, provided the borrower satisfies all stipulated requirements before closing.

Finalizing Your Multifamily Loan

Once a loan commitment is issued, the final steps involve legal reviews, meeting remaining conditions, and the formal closing of the transaction.

Review of loan documents

Reviewing loan documents is a significant undertaking. The borrower, often with legal counsel, examines all legal agreements. These documents include the promissory note, detailing repayment terms, and the mortgage or deed of trust, securing the loan against the property. The loan agreement outlines covenants, terms, and conditions, while the closing statement itemizes financial transactions and fees.

Meeting conditions precedent

Meeting conditions precedent is necessary before loan funding. The loan commitment letter specifies remaining requirements to be fulfilled by the borrower. These conditions might include updated insurance certificates, final property inspections, or specific property repairs. Satisfying these conditions demonstrates adherence to agreed-upon terms and ensures the property meets lender standards prior to closing.

Closing process

The closing process represents the formal conclusion of the loan transaction. This meeting involves all parties, including the borrower, lender representatives, and legal counsel. During closing, all necessary documents are signed, formally transferring ownership or completing refinancing.

Funding and disbursement

Following closing, funding and disbursement of loan funds take place. For property acquisitions, funds are transferred to the seller. For a refinance, funds may be disbursed to the borrower or used to pay off the existing mortgage. For construction loans, funds are disbursed in draws based on construction progress, as outlined in the loan agreement.

Post-closing considerations

Post-closing considerations include ongoing requirements. This may involve establishing escrow accounts for property taxes and insurance premiums, managed by the lender or a third party. Initial reporting to the lender may be required, particularly for construction projects, to update on progress. For construction loans, establishing clear construction draw schedules outlines the process for future fund releases.