There are many financing options available for apartment buildings.

First of all, for commercial financing, a multifamily property must have at least 5 units. A duplex, triplex or four-plex is considered residential property and does not qualify for a commercial loan.

Apartment loans can either be conventional or government-insured (FHA, Fannie Mae, Freddie Mac). Here are the general differences in the terms.

Conventional Apartment Loan Terms

Keep in mind the longer the fixed term you want and the higher the loan-to-value and other risk factors, the higher the spread will be over the Index for a higher interest.

Acquisition and Refinance: rate and term and cash-out

• Loan-to-value: Typically up to 80%. Some lenders will loan up to 85%

• Term period: 2, 5, 7, 10 years. A few lenders offer a 30 year period with a declining fixed rate option for small balance loans. Expect to pay a premium on the interest rate.

• Amortization period: 10, 15, 20, 25, 30 years

• Interest rate: Usually based on a spread above the 10-year Treasury but other Indexes can be used.

• Prepayment penalties: Yes, terms vary.

• Liability: Typically full-recourse. Some lenders offer partial or non-recourse. Expect there to be a cost in the rate or fees for partial and non-recourse terms.

• Qualifying criteria: Typically the property supports itself. However, for small balance loans under $2.5 million, the lender will still want to qualify the borrower based on credit and income.

• Minimum loan amount: $500,000 with most lenders. Local banks typically have lower minimum loan amounts.

• Turn time: Funds in 45-60 days

New Construction

• Loan-To-Cost: Typically up to 80%

• Term Period: Typically 6 to 24 months

• Amortization Period: Typically interest-only

• Liability: Typically full-recourse

• Qualifying criteria: Typically property supports itself. The developer will need to provide a good tract record for development projects. This is not an area for beginners.

• Minimum loan amount: $500,000 with most lenders. Local banks typically have lower minimum loan amounts.

• Turn time: Funds in 45-60 days

You must have an exit strategy in place to either sell the property upon completion and/or a certain occupancy level or obtain permanent financing.

FYI: Rehab Project For rehab properties, borrowers typically obtain a short term loan known as a bridge loan for acquisition of the property and rehab costs. You must have an exit strategy in place to sell the property when the rehab is completed or obtain a permanent loan.

Government Insured FHA Apartment Loan Terms

Acquisition and Refinance: rate and term and cash-out

• Loan-To-Value: Up to 85%, seller carry-back note allowed up to 7.5% of the purchase price. So you can feasibly leverage into a purchase with only 7.5% down payment

• Term period: 35 years

• Amortization period: 35 years (self amortizing loan with no balloon)

• Interest rate: Usually based on a low spread above the 10-year Treasury

• Prepayment penalties: Yes, terms vary.

• Liability: NON-recourse

• Loan is assumable

• Qualifying criteria: The property supports itself without the need for the borrower’s personal income or credit.

• Minimum loan amount: There is no set minimum loan amount by FHA, however the lender may set a minimum loan amount. Also, FHA financing has a few additional loan costs that is easier to spread over a larger project. Therefore, an FHA loan is best suited for loan amounts around $2 million +

New Construction

The attractive features about FHA financing for new construction is the loan is designed as a combined construction to perm loan. This means your interest rate is locked in from the beginning and there is ONE closing. After receiving your occupancy permit, the loan automatically converts to the 40 year term.

Many developers use this program in conjunction with their Tax Credit Application Approvals for low income housing.

So while an FHA takes longer to process, the loan features are definitely worth it for most developers. In the case of a real time constraint to close quicker, bridge financing can be used to secure the purchase of land.

• Loan-To-Cost: Up to 90% Developer’s fee of 10% can be used toward the down payment requirement. Land acquisition can be included in the financing.

• Term period: 40 years

• Amortization period: 40 years (self amortizing loan with no balloon)

• Interest rate: Usually based on a low spread above the 10-year Treasury

• Prepayment penalties: Yes, terms vary.

• Liability: NON-recourse for both construction period and permanent financing

• Loan is assumable

• Qualifying criteria: The property supports itself without the need for the borrower’s personal income or credit.

• Minimum loan amount: There is no set minimum loan amount by FHA, however the lender may set a minimum loan amount. Also, FHA financing has a few additional loan costs that is easier to spread over a larger project. Therefore, an FHA loan is best suited for loan amounts around $2 million +

Major Rehab

The attractive feature about FHA financing is the ability to complete major rehab work on the property as part of the acquisition or for an investor who wants to rehab an existing building he/she owns.

The rehab loan is treated the same way as a new construction loan. The loan is designed as a combined construction-to-perm loan. This means your interest rate is locked in from the beginning and there is ONE closing. After receiving your occupancy permit, the loan automatically converts to the 40 year term.

Many developers use this program in conjunction with their Tax Credit Application Approvals for low income housing.

So while an FHA takes longer to process, the loan features are definitely worth it for most developers and investors. In the case of a real time constraint to close quicker, bridge financing can be used to secure the purchase of the apartment building.

• Loan-To-Cost: Up to 90%

• Term period: 40 years

• Amortization period: 40 years (self amortizing loan with no balloon)

• Interest rate: Usually based on a low spread above the 10-year Treasury

• Prepayment penalties: Yes, terms vary.

• Liability: NON-recourse for both construction period and permanent financing

• Loan is assumable

• Qualifying criteria: The property supports itself without the need for the borrower’s personal income or credit.

• Minimum loan amount: There is no set minimum loan amount by FHA, however the lender may set a minimum loan amount. Also, FHA financing has a few additional loan costs that is easier to spread over a larger project. Therefore, an FHA loan is best suited for loan amounts around $2 million +

To get started with obtaining a multifamily loan, review the Commercial Loan Services Section. My team and I look forward to helping you soon.