Multi-Family Property Lending Options
There are a variety of multi-family properties that range from smaller two to four unit properties or larger properties with five units or more. Whatever the type of property investors choose to invest in, the benefits of investing in multi-family real estate are abundant.
Multi-family properties with up to four units are considered residential properties for financing purposes. These types of properties can be financed through a typical mortgage that is also used in single-family home transactions. Multi-family properties with five or more units are considered commercial real estate properties. Commercial properties maintain completely different processes and requirements from the typical residential mortgages. All in all, down payment requirements, tend to be higher for multi-family properties than for single-family homes whether or not they are commercial or residential.
Lending options differ when it comes to the type of property (residential or commercial), but they also depend on whether or not the property is owner-occupied. An owner-occupied property is exactly as it sounds, it is a property in which the owner is the investor as well a uses the property as a primary place of residence resides.
When it comes to owner-occupied and non-owner occupied financing, lenders offer owner-occupied investors more options in terms of their loans. However, non-owner occupied properties are restricted to conventional loans.
Here are the different lending options for commercial or residential properties that are owner and non-owner occupied.
Owner-Occupied Two to Four Unit Financing
When it comes to financing an owner-occupied two to four unit property generally the buyer qualifies to take out a larger mortgage loan, therefore, a more expensive property. Lenders take into account that 75% of the rental income from the rest of the units will be added to the owner’s income, which is what qualifies the buyer for a larger loan. A conventional loan for a two-unit property generally requires at 15% down payment, while a three to four unit property will generally require a 25% down payment.
Lenders generally grant owner-occupied loans with more favorable terms such as lower interest rates because the buyers are purchasing their primary place of residence. Owner-occupied two to four unit properties are generally accompanied by a few different financing options. Investors can choose from a Federal Housing Administration (FHA) loan, Veterans Affairs (VA) loan, or conventional financing.
- An FHA loan is a government-backed mortgage that is insured by the Federal Housing Administration. Popular with first time home buyers, FHA loans require lower minimum credit scores and can require a down payment as low as 3.5%. FHA loans are ideal for borrowers with small savings and those that can not qualify for a conventional loan due to less than ideal credit scores. FHA loans are strictly used for borrowers who are buying a property and plan to use that property as their primary residence.
- A VA loan is a mortgage backed by the Department of Veteran Affairs and are granted by private lenders. For those who qualify, a VA loan consistently offers borrowers lower rates than conventional financing. Borrowers only qualify for VA loans if the property will be used as a primary residence. The main benefit of a VA mortgage is that it is possible to obtain the loan with no down payment, they are also more lenient when it comes to credit scores.
Non-Owner Occupied 2-4 units
Any property that the owner does not reside in is regarded as an investment property and therefore maintains it’s own set of requirements. Generally, down payments on non-owner occupied 2-4 unit properties require 25%. When it comes to financing non-owner occupied properties, lenders require higher credit scores and a better debt-to-income ratio.
Another option includes a hard money loan, which is a short term loan with higher interest rates. Hard money loans benefit investors with low credit scores because lenders do not consider the investor’s credit score, rather they evaluate the value of the income property the investor is planning to obtain. Hard money loans are beneficial to investors who plan to buy cheap properties, renovate them up, then resell them for a profit and use some proceeds to pay off the loan.
Owner Occupied 5+ Units
Owner-occupied commercial real estate financing options include a conventional commercial real estate loan, an SBA 504 Loan, or an SBA 7a loan.
- Conventional CRE loans are best for buyers who have available cash to immediately put into the loan. Conventional CRE loans tend to have the lowest fees and most competitive rates. Most lenders require a 20% minimum down payment and have shorter loan terms and fixed rate periods.
- SBA 504 loans maintain longer fixed rates with low rates and higher fees. A 10% down payment is often required. SBA 504 loans tend to have stricter payment penalties than other options.
- SBA 7a loans benefit buyers that do not have the cash for a down payment. Although this option maintains higher rates and fees, SBA 7a loans offer the most flexibility when it comes to the use of the proceeds.
Non-Owner Occupied 5+ Units
Most investors use traditional, fixed-rate mortgages to purchase multi-family properties with 5 or more units. Lenders generally require a minimum of 25% down for a fixed rate mortgage that can last anywhere between 7 to 30 years. Lenders ensure that the existing rents are able to support the debt service before.
- A conventional loan generally requires at least a 20% down payment and a minimum loan to value ratio of 80%. Lenders recommend a credit score of 740 to maintain the best rates.
- Commercial bridge loans are short term commercial real estate loans that investors use when permanent financing is not an option. Investors tend to use commercial bridge loans when a property requires significant renovation. The loan amount is based on the value of the property after the improvements rather than the as-is value. Repayment options range between 6 months to 3 years, then the property is sold or refinanced with permanent financing.