Traditional mortgages for single-family homes differ from larger multifamily loans. The difference starts at five units and up. One to four units is considered residential real estate while five units and over is considered commercial real estate. There are five different types of loans you can get for commercial multifamily financing.
Bank Recourse Loan
Banks are primary lenders for single-family homes, but they also do commercial loans as well. The typical term for a single-family home is a 30-year amortization period whereas a commercial term is 20 to 25 years amortized. The loan term is usually 3 to 5 years. This means the payments are based on the 20-to-25-year amortization schedule, but the loan becomes due at the end of the 3-to-5-year term. The loan is also recourse, meaning the borrower will have to sign a personal guarantee. The banks can go after the borrowers’ personal assets if the collateral does not cover the loan amount. The bank loans can provide 1 to 2 years of interest only payments. This is important because the debt service is lower with only paying interest and not principal. The maximum loan-to-value (LTV) for a new purchase or a refinance would be 75%. This includes the rehab of the property. There is little to no prepayment penalty and is available to new investors. To build experience new multifamily owners will sometimes use bank recourse loans to gain experience.
Fannie Mae
Fannie Mae was chartered by U.S. Congress in 1938 to provide a reliable source of affordable mortgage financing across the country. They provide financing for stabilized multifamily properties. To qualify for a Fannie Mae loan, the property must be occupied at 90% for the last 90 days. It is a non-recourse loan meaning the property is the collateral and no personal guarantees are needed. The loan is in terms of 5, 7, 10, or 12 years amortized over 30 years. Interest only payments are available from 1 up to 5 years. Usually there is a fixed rate for these types of loans but there are also floating rates available with the purchase of a rate cap. The maximum LTV for a new purchase is 80% with the rehab included and 75% for a refinance. One downside to a Fannie Mae loan is the yield maintenance required. The yield maintenance can be 4% or 5% in the first couple of years and is on a stepped-down basis throughout the term. A new investor does not qualify for a Fannie Mae loan so they will want to see a real estate resume with multifamily experience.
Freddie Mac SBL
Freddie Mac Small Balance Loans are open to new investors. The small balance loan ranges from $1 million to $7.5 million. It is a non-recourse loan and the typical loan terms are 5, 7, or 10 years. The loan is amortized over a 30-year period and the interest only is available for 1 to 5 years. The property must be stabilized like Fannie Mae—90% occupied for the last 90 days. The maximum LTV for a new purchase is 80%, however the rehab budget is not included in the loan so the sponsor will have to raise more equity for capital expenditures. The maximum LTV for a refinance is 75%. There is limited to no prepayment penalty.
Freddie Mac Conventional
Freddie Mac Conventional is for loans above $7.5 million. It is also a non-recourse loan with similar loan terms as the Freddie Mac SBL. Typical loan terms are 5, 7, or 10 years with interest only for 1 to 5 years. The loan is amortized over 30 years and the maximum LTV is 80% for new purchases. The rehab budge is included in the conventional loan. The occupancy will also need to be stabilized at 90% for the last 90 days. The borrower or borrowers will need to demonstrate experience owning and operating multifamily properties. The prepayment is typically 1% and fixed or floating rates are available.
Bridge Loans
Bridge loans have become popular in the latter half of 2021. They typical loan terms are 3 to 5 years. The term is usually 3 years with the option to do two 1-year extensions. It is a temporary financing solution to get more permanent financing from the agencies Fannie and Freddie later. However, bridge loans can be good for apartment syndicators because they can buy a property, try to meet investor expectations in 3-5 years and sell or do a cash-out refinance. It is a non-recourse loan with interest only for 3 years. The loan is amortized over 30 years and the maximum LTV is 80%. This includes the rehab budge of the property, and the prepayment is typically 1%. Bridge loans are also good for getting around hefty prepayment penalties if the sponsors want to make a better return in a 3-to-5-year hold period. The borrower will need multifamily experience.
Conclusion
This is a broad overview of the loans available for multifamily financing. It is important to work with a mortgage broker to help get you the best terms in a constantly changing market. You can reach out to me at jwilson@oldcapitallending.com if you need assistance.
