Multifamily Loans:
Finance Multi-Unit Properties

Get your deal prequalified FAST!

Multifamily loans are crucial financial instruments for investors seeking to purchase, refinance, or develop properties with multiple residential units. This in-depth guide covers everything you need to know about multifamily financing options from loan requirements to application processes and beyond.

A multifamily loan is a specialized mortgage product designed for properties with five or more residential units. These loans cater to investors and property owners managing apartment buildings, condominiums, or other multi-unit dwellings. Multifamily loans differ significantly from traditional mortgages in several key aspects:

Multifamily Loan Requirements and Qualifications

Multifamily loan requirements vary depending on the lender and specific loan program. Generally, qualifications include:

  • Property types: 5-8 units, 9-30 units, or larger complexes
  • Mixed-use properties: Allowed if at least 51% is residential
  • Credit score: Typically 680 or higher
  • Down payment: Usually 20-30% of the property value
  • Debt Service Coverage Ratio (DSCR): Minimum 1.25 or higher

We have three (3) main types of multifamily documentation:

  1. Traditional loans: Based on the borrower's personal income, credit, and property rents
  2. DSCR loans: Based on the property's actual rent or projected rents if vacant
  3. Stated Income loans: The property's income is stated; usually equal to or above market rents within reason

DSCR Calculation for Multifamily Properties

The Debt Service Coverage Ratio is a critical metric in multifamily lending. It's calculated by dividing the property's net operating income by its annual debt service. A DSCR of 1.25 or higher is typically required for approval, indicating that the property generates 25% more income than needed to cover its debt obligations.

Multifamily Financing Options

The multifamily lending landscape offers various financing options to suit different investor needs:

Conventional Multifamily Loans

These loans are offered by banks, credit unions, and private lenders. They often have competitive rates but may have stricter qualification requirements.

Government-Backed Multifamily Loans

Programs like FHA, Fannie Mae, and Freddie Mac multifamily loans offer attractive terms and potentially lower down payments, especially for first-time investors.

Multifamily Bridge Loans

These short-term financing options help investors quickly acquire properties or fund renovations before securing long-term financing.

Small Balance Multifamily Loans

Designed for properties valued between $750,000 and $7.5 million, these loans often have simplified underwriting processes.

Multifamily Construction Loans

These loans finance the development of new multifamily properties, covering costs from land acquisition to construction completion.

DSCR Multifamily Loans: A Deeper Dive

DSCR (Debt Service Coverage Ratio) multifamily loans are a popular non-QM (non-qualified mortgage) option for investors looking to finance properties with 5-8 units or 9-25 units. These loans are particularly attractive because they focus on the property's income potential rather than the borrower's personal income.

Key features of DSCR multifamily loans include:

  • Minimum DSCR requirement of 1.20
  • Property management experience or prior rental property ownership required
  • Flexible income documentation
  • Potentially higher interest rates compared to conventional loans

DSCR loans are ideal for investors in California's second and third-tier cities, where multifamily properties offer attractive returns. Cities like Fresno, Bakersfield, and Stockton present opportunities for investors to capitalize on growing rental markets without the intense competition found in first-tier cities like Los Angeles or San Francisco.

For example, an investor purchasing a 12-unit apartment complex in Modesto might use a DSCR loan to finance the acquisition. The lender would evaluate the property's potential rental income against its expenses and debt obligations to determine loan eligibility. This approach allows investors to qualify for larger loan amounts based on the property's performance, even if their personal income might not support such a loan under traditional underwriting standards.

Maximizing DSCR for Multifamily Loan Approval

Achieving a strong DSCR is crucial for multifamily loan approval and favorable terms. Here are strategies to improve your DSCR:

  1. Increase property income:
    • Implement strategic rent increases
    • Add value-added services or amenities
    • Reduce vacancy rates through effective marketing
  2. Reduce operating expenses:
    • Implement energy-efficient upgrades
    • Negotiate better rates with service providers
    • Streamline property management processes
  3. Optimize loan structure:
    • Consider a larger down payment to reduce the loan amount
    • Explore interest-only periods to lower initial payments
    • Negotiate for longer amortization periods

Investors targeting properties in cities like Santa Rosa, Vallejo, or Concord can leverage these strategies to improve their DSCR and secure more favorable loan terms. These markets often offer a balance of solid rental demand and reasonable property prices making them attractive for DSCR-based multifamily investments.

California Case Study

A self-employed real estate investor in San Francisco used a multifamily loan to acquire a 12-unit apartment complex. The DSCR loan program allowed approval based on the property's projected income, overcoming the challenges of irregular personal income. This acquisition expanded the investor's portfolio and provided a steady cash flow stream.

Texas Example

In Austin, a group of investors leveraged a multifamily construction loan to build a 20-unit complex. The loan's terms accommodated the project's timeline and provided competitive rates, enabling a successful development. Upon completion, the property achieved full occupancy within three months, demonstrating the strong demand for multifamily housing in the area.

Success Stories: Multifamily Loans in Action

A self-employed real estate investor in San Francisco used a multifamily loan to acquire a 12-unit apartment complex. The DSCR loan program allowed approval based on the property's projected income, overcoming the challenges of irregular personal income. This acquisition expanded the investor's portfolio and provided a steady cash flow stream.

In Austin, a group of investors leveraged a multifamily construction loan to build a 20-unit complex. The loan's terms accommodated the project's timeline and provided competitive rates, enabling a successful development. Upon completion, the property achieved full occupancy within three months, demonstrating the strong demand for multifamily housing in the area.

 

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Disclosure: Minimum loan amount is $1,000,000 for residential bridge loans. Loan guidelines are subject to change per lender at any time until the loan is approved and the rate is locked. Borrowers must be approved by underwriting. Not all applicants will qualify.