Multi-Family Business Loans: An Investor’s Guide
Investors focused on property investment, in particular an apartment or multi-family property, will eventually have to obtain a ready. Understanding how multi-family business loans work before an offer is accepted will make the loan application and loan process much easier. Find out how the multifamily funding works, the different types of financing options available and what the lending process looks like.
What is a multi-family business loan?
Commercial Multi-family loans can be short or long-term loans for the development, purchase or even the rehabilitation of multi-family buildings of five or more units. Loans typically start around $ 500,000, going up to tens of millions of dollars. Interest rates, term rates, loan limits, and down payment requirements will all vary depending on the specific financing program.
Multi-family business loan programs
There are several types of multi-family mortgage programs aimed specifically at multi-family investors, but they are generally divided into three categories:
- Government guaranteed loans
- Conventional loans
- Private loans
Government guaranteed loans
Government Guaranteed Loans are loans issued by or guaranteed by the Federal Housing Agency (FHA) and Government Sponsored Entity (GSE) Fannie Mae.
Fannie Mae has a multitude of financing programs available, which include long term financing for stabilized properties. This is by far their most popular program for established multi-family properties due to the favorable 30-year term and high 80% rate. ready to value limit. They also offer short-term financing programs, including a 5 or 7 year adjustable loan, bridging loans, mixed-use multi-family loans that have alternative uses including retail space, offices or homes. public parking lots; and subordinate modification or rehabilitation loans that can accompany other loan programs.
Government guaranteed loans have major advantages over other multi-family loan programs, the most important being that they are non-recourse, meaning that the lender cannot personally exercise recourse on other assets owned by the government. the borrower beyond the collateralized property in the event of default. They also offer competitive rates, which can be fixed or variable, over a long period. However, minimum loan amounts start at $ 750,000 and are generally only offered for existing properties, which means they are not ideal for new developments.
A conventional mortgage is a loan from traditional lending institutions, which may include a bank, credit union, or non-bank lender. Conventional loans are great for investors purchasing a lower value property with loans starting at $ 500,000. The term length will vary depending on the lender and the conventional program, which may be a shorter term limit, such as 5-10 years, or a longer term of up to 30. Conventional loans may have rates of. higher interest than a government loan, which can be fixed or variable. Most conventional loans are recourse and require a down payment of 20% or more. The main advantage of choosing a conventional loan program is that it offers construction financing for new developments and lower loan amounts.
Private loans are loans issued in the private sector, which may include loans from a family member, friend, or an established private loan company. Private lenders usually offer short term loans such as a hard money loan which can last from one year to several years with high interest rates. Private loans are great for properties that do not qualify for conventional financing or government loan programs, and they allow the investor to improve the property, establish a rental history, and then seek permanent financing. once improved.
Just as loan terms vary, the loan process and requirements can change depending on the program requested. It helps to have someone walk you through the process and help you prepare your documents, which can be large. This can be a representative of the bank, such as a loan officer, or you can hire a third-party mortgage broker for a fee. Lenders in any capacity will generally require the following:
- Applicant information including name and ownership percentages of major owners (anyone with 15% or more ownership of the owning entity)
- CV and basic information for applicants
- Purchase contract signed for the property
- A property or project summary, such as a business plan or executive summary
- Scope of work for the project, including budget or quotes for renovations, equipment or construction
- Verification of income with bank statements or W2 (usually since the beginning of the year)
- Three years of personal and business income tax returns for all applicants
- Documentation of down payment sources
- Projected revenue and profits for the next one to three years
- A personal financial statement, including personal and business debts
- The last two to three years of financial statements in the form of an income statement and balance sheet
- The role of property rents (if the property produces income)
- A blueprint or architectural designs of new construction or construction projects
- The name and contact information of the architect or general contractor overseeing the renovations or construction
The loan will be sent to a loan underwriter who will review all of this information. Lenders will review the property’s financial statements, including debt-to-service coverage ratio and the estimated current and projected value as well as the person’s experience, equity and debt-to-income ratio to ultimately determine whether the loan will be approved and on what terms, if so.
The entire loan process, from application to disbursement of funds, can take an average of four to eight weeks, but largely depends on how quickly the applicant is able to provide the required documents to the team. subscription for review. Depending on the program, there may be continuous monitoring to ensure that loan funds are allocated appropriately to the project. This is particularly common for construction or rehabilitation loans.
Multifamily loans at a glance
Multi-family loans are one of the easiest business loans to obtain due to the large number of programs available to borrowers. Some projects, such as affordable housing, may benefit from more favorable terms or programs, but final approval for funding depends on the individual project and investor. It’s a good idea to shop around and find out which program will meet your specific investment needs before you apply.