Published December 19, 2011
An apartment building loan, also called a multifamily loan, is a commercial loan. Where a residential loan is made primarily to the quality of the borrower, a commercial loan is made to the quality of the income of the property, the quality of the property itself, and the quality of the borrower. So there are really three pre-qualifications for a loan on an apartment building.
THE THREE PRE-QUALIFICATIONS FOR AN APARTMENT BUILDING LOAN
1. The quality of the income of the property
If you take the gross rental income, including rents, laundry, utility reimbursement, etc., and subtract expenses, you get “net operating income." If you divide annual net operating income into annual mortgage payments, you get what is called a “debt coverage ratio” or DCR. For most multifamily loans, this ratio should be at least 1.25 to 1. This means that for every dollar of loan payment, you have an additional 25 cents. We do have some loan programs that require only a DCR of 1.20, which means that we can lend you more money for your apartment loan.
2. The quality of the property
The quality of the property includes the quality of the location, also known as demographics (really looking for a population of 25,000 or more), the physical condition of the property, it’s age and remaining life – this includes all major systems – structure, electrical, plumbing, interiors, HVAC, landscaping and paved surfaces. All of these major systems should be in good condition to help you get the best possible apartment loan, including loan rates and loan terms. The lender will require a property condition report to determine this.
3. The quality of the borrower
The quality of the borrower used to be in third place, as far as importance to the lender on a commercial loan. But since the recession it is now the most important pre-qualification. These are the minimum pre-qualifications for the borrower:
Credit: a credit score of 680 or above with no mortgage lates, no bankruptcies or foreclosures in the past 10 years. Experience: Ownership of an apartment building (five units or more) or other commercial property for two years. Borrower’s primary residence: Borrower should live close to the property, or at a minimum in the same state. The exception is if the borrower has a history of successfully owning an apartment building out of state.
If you will keep these three pre-qualifications in mind for your apartment building loans, you will be on your way to creating a successful commercial loan experience.
By Terry Painter, President