Multifamily Mortgage Loan Types of Financing

Multifamily mortgage loan is an excellent financing option for inspiring real estate developers and investors to build a portfolio of houses, apartments or condominiums. However, it’s important to understand the different types of financing available.

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For example, some fees are longer-term, such as the upfront mortgage insurance premium (MIP) on HUD or FHA apartment loans. And some interest rates are higher, such as on a bridge or mezzanine loan.

1. Leverage

Multifamily mortgage loans are available from a wide range of lenders including traditional banks, mortgage brokers and credit unions. Most multifamily mortgages are conventional loans which adhere to the lending guidelines set by Fannie Mae and Freddie Mac. Most conventional loan programs require borrowers to maintain reserves equal to three months of their total monthly housing expenses (mortgage payment, property taxes and homeowners insurance) in order to handle unexpected cash flow challenges.

Some lenders offer a sliding scale of leverage or interest-only options depending on the size and type of property. For example, residential (2-4 unit) multifamily mortgage lenders can often provide a 100% loan-to-value ratio with lower down payments than commercial (4-6 units) lenders.

Borrowers can also secure non-recourse financing, which only uses the financed multifamily property as collateral for the loan. However, this type of financing comes with higher costs because it requires more extensive due diligence and ongoing monitoring of the underlying property.

Besides conventional loans, there are many alternative types of multifamily financing, including bridge loans and life company debt. Bridge financing packages can be particularly useful for investors who are awaiting more advantageous long-term financing options to become available.

2. Interest Rates

Whether you’re interested in buying an owner-occupied property or an investment property, you’ll want to take into account the interest rates that are available for multifamily mortgage loans. Typically, the interest rate is lower than that of single-family residential mortgages. This is due to the lower risk associated with multifamily properties, which makes them attractive to lenders.

The types of interest rates available for multifamily mortgage loans depend on your lender, loan program, and credit profile. For example, conventional loans are often offered by Fannie Mae and Freddie Mac as well as banks, life companies, and other financial institutions. They’re also known as conforming loans because they meet the standards set by Fannie Mae and Freddie Mac, which provide liquidity and stability to the mortgage market.

Conventional multifamily mortgages are offered for both owner-occupied and investment property and may be used to purchase new construction or existing buildings. In addition, the FHA offers a conventional multifamily mortgage program called HomeReady and Freddie Mac’s Home Possible programs that offer up to a 3% down payment for qualified borrower with a lower debt-to-income ratio and more flexible credit requirements.

If you’re thinking of purchasing a multifamily property, you’ll want to shop multiple lenders for the best interest rates. Multifamily mortgage rates fluctuate daily and depend on factors like location, asset class, DSCR, sponsor, and much more. To get the most accurate rates, speak to a multifamily loan specialist today by filling out this form.

3. Taxes

When purchasing a multifamily property, it’s important to understand the tax implications. The property will likely be subject to a fair market value appraisal as well as property taxes. This is important to consider since property tax rates may change over time. Additionally, if the owner occupying one of the units, it’s possible that they could be subject to personal income tax deductions.

Generally, the mortgage loan limits for multifamily properties are higher than they are for single family homes. This is because buying additional units adds to the overall cost of the property. This means that you’ll need a larger down payment in order to purchase the property.

For buyers who want to invest in a multifamily property but don’t have the credit or cash reserve needed to buy it, there are other financing options. For example, a seller carry-back note can be used to purchase a multifamily property. This is also referred to as seller financing and is a popular option among experienced investors.

The lender will take the buyer’s current credit profile and income into consideration when determining qualification for a multifamily mortgage loan. They will also look at recurring debts and minimum payments on revolving credit cards as part of the total debt-to-income (DTI) calculation. In addition to these factors, the lender will also factor in projected rental income for the property after a vacancy factor is applied.

4. Required Reserves

Lenders use mortgage reserves to help protect themselves against borrowers who may lose their income. They require a certain amount of cash reserves to cover a borrower’s monthly housing costs including principal & interest, property taxes, homeowners insurance and HOA dues, also known as PITI.

Generally, mortgage lenders want to see a borrower’s cash reserves equal to two months of their mortgage payment after closing. This helps them feel confident that if the borrower were to lose their job or become ill, they would have enough money on hand to make their mortgage payments until they can find a new job.

Reserve requirements are different for investment properties versus the primary residence. For example, Fannie Mae’s DU desktop underwriting system requires two months of reserves for second homes and vacation properties and three months of reserves for investment property transactions and high LTV refinances. Reserves are required to be held in escrow and may include funds received from acceptable sources such as a gift, the cash value of a vested life insurance policy or proceeds of a reverse mortgage.

As a result of the COVID-19 pandemic, Freddie Mac and Fannie Mae have recently tightened their multifamily loan guidelines to allow for higher debt-to-income ratios and more reserves. While this tightening of guidelines is a temporary measure, it will make it more difficult for borrowers to qualify for multifamily loans in the near future.