Multi family mortgage loans are financing instruments that finance multi unit properties with 2 or more units. These loan programs allow real estate investors who specialize in purchasing multi family units to leverage their funds to purchase or refinance property.
There are numerous multi family loan programs available out in the market today. Conventional Multi Family, Government Backed Multi Family, Private Multi Family and Portfolio Multi Family Loans. Each loan program has its own set of requirements.
Conventional Multi Family Loans
Are conforming loans offered by traditional banks and lenders on 2 to 4 unit properties. Conventional multi family loans fall under Fannie Mae’s guidelines for qualification and loan amounts but are not backed by the federal government.
These loans require a downpayment of 20% or more and loan amount limits vary by County. Any property purchased with a conventional multi family loan must be in good condition and require little to no rehab.
Conventional mortgages for multi family properties are right for investors who are looking for long loan terms. Conventional Loan products offer 15 and 30 year notes with rates ranging from the high 4 to 6 percent range. Variable loan terms are also available with rates tied to the LIBOR index.
Credit guidelines for a conventional multi family loan require a minimum 680 FICO score and a debt service coverage ratio of 1.25 or higher. The debt service coverage ratio is the amount of the cash flow available to cover the debt payments. When underwriting the loan for approval the lender will also require a borrower to have 6 to 12 months of reserve funds.
Conventional multi family loans typically have the best rates and terms with the lowest fees available and are incredibly favorable for investors who want to buy and hold properties as long term investments.
Government Backed Multi Family Loans
Government backed loans for multi family properties are sponsored by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Government backed financing can allow for 2-4 units but they also carry programs that allow five units or more.
The down payment requirements are a minimum of 20% of the purchase price but the FHA 223 (F) program is able to offer a loan program that will allow for as low as 13% of the purchase price on a purchase.
Loan terms on Government backed loans can range from 5-35 year fixed with interest rates starting at 5 percent or higher.
Credit guidelines for a Government backed multi family loan require a minimum 650 FICO score and a debt service coverage ratio of 1.25 or higher and when underwriting the loan for approval the lender will also require a borrower to have 9 months of reserve funds.
Much like the conventional multi family loan, the government backed loans are also well received in the marketplace. These loans have good rates and terms and the fees are reasonable. You can expect to pay a bit more in fees with a Government backed loan than with a conventional loan but for the purposes of investing in multi family properties, Government backed Multi Family loans are a great tool to purchase and refinance multi family properties.
Private Multi Family Loans
Privately funded multi family loans are non conforming loans that are not backed by any government insurance. Private Multi Family Loans will allow financing on any property that contains more than two units.
Private loans for multi family require a minimum of 20% down with loan terms typically ranging from 2-7 years. Most private money loans for multi family are variable rate loans that are fixed rate for those 2-7 years. Longer terms are available but at a higher cost.
Interest rates on private multi family loans start in the mid 6% range and can go much higher than that depending on credit history and property type. Where the private money really differs from the conventional and government backed routes are in fees. Loan costs on a private money loan can be upwards of 5 points on most transactions.
Credit guidelines for Private multi family loans require a minimum 600 FICO score and they typically like to see that a borrower has at least six months in reserves. As far as debt service coverage, things vary depending on the property type and if or if not the loan is being underwritten as a stated income loan or if you are using lease amounts to qualify.
Private multi family loans have a more broad criteria for approval. They can finance you with bad credit, lower income and less hassle than a government backed or conventional loan. That being said, you will be charged more for whatever it is that the borrower is lacking. If as a borrower your credit score is low or you don’t have the full nine months reserves required for a conventional or government backed loan then expect to pay more in both interest rate and upfront fees with a private loan product.
Private money loans are incredibly useful. They help finance many fix and flip ventures and they allow investors who want to buy a distressed property the ability to buy and rehab the property. After the property has been rehabilitated then the investor can seek permanent financing with a government backed or conventional multi family loan.
Portfolio Multi Family Loans
A portfolio multi family loan is a non conforming loan product that is used to buy multi family property with two or more units. Portfolio loans are more flexible in regards to their requirements and can finance four to ten properties at one time.
Portfolio financing terms can go from 3 to 30 years and because portfolio lenders are not required to meet government or Fannie/Freddie guidelines, down payments required can be as low as 3 percent.
Interest rates on portfolio loans are typically 5 to 8 percent depending on the property type, credit history and loan term. Most portfolio lender like to see FICO scores above 650 but there are a few out there that will go down to as low as 600 but expect to pay a premium. Closing costs on these loan products can be zero or can go up from there. Debt servicing requirements will also vary from lender to lender.
During underwriting, the lender will take into account numerous factors such as but not limited to, amount of reserves, occupancy minimum percentages, borrower credit history and property type then decide what they require from a borrower. Keep in mind that due to the large amount of lenders offering product and the fact that they all march to their own drummer in that their guidelines are self imposed, all of these factors can range from lender to lender.
Much like the private money loan we spoke of earlier, portfolio loans do not have to adhere to any mandated guidelines other than their own and their investors. This allows the lender to go outside of the box a bit when approving their loans. This is why it is extremely important that you are speaking with a qualified loan professional when discussing your financing options.
A qualified loan professional can help you navigate through all the options we mentioned above and can help you with understanding the process and achieving your goals. Don’t hesitate to give us a call to go over your needs and goals list. Investing in real estate, especially multi family can be an overwhelming career and it’s so much easier when you have a good team. Make us part of your team and start seeing the benefits that having experts on board can make.