September 19, 2014
Apartment financing is similar but also quite different to taking out a loan on a residential home. Any property with more than five units is considered commercial with its own underwriting and funding criteria. Here is what you need to know before applying for apartment financing.
Since what is known as the great recession of 2008, commercial apartment financing is similar to home loan financing in that the financial strength and credit of the borrower is the most important. Prior to the recession the quality of the property's income and the quality of the real estate itself was most important. Like home loans, apartment financing can go up to 80% of the property value, but most loans max out at 75%. Apartment financing usually does not permit secondary financing.
You will need meet the following criteria to qualify for low rate apartment financing:
- A credit score of 680 and above with preferably no mortgage lates (one or two if you can give a good reason for them might work), no tax liens, or judgements
- A net worth equal to the size of the loan or larger
- Enough cash in the bank (publically traded stocks can be ok)for the down payment (if it’s a purchase), closing costs and 12 months of mortgage payments in post-closing liquidity.
- Preferably some experience in owning 5 units or more or an apartment complex
- A property that shows at least 12 previous months of net operating income sufficient for a 1.25 DSCR (debt service coverage ratio). DSCR is the annual net operating income divided by the annual loan payments (principal and interest).
- A property that is in good condition
The loan amount can be unlimited with up to 30 years as its term and amortization. However most community banks limit the fixed rate period to 5 years and have a 25 year amortization. In the event of default, your personal assets are usually at risk, but on larger commercial loans you can sometime qualify for non-recourse financing where a personal guarantee is not required. The fees are much higher on commercial mortgages than residential ones. There are almost always prepayment penalties.
Unlike residential loans, apartment mortgages can be taken out by corporations, limited liability companies, limited partnerships and businesses. Many investors purchase apartment buildings with five or more units of mixed commercial and residential space. This is called a mixed use property. As long as 75 percent of the space is residential, usually qualify for lower rate multifamily or apartment financing. You cannot rent each unit on a daily or weekly basis and single-occupancy rooms will not be permitted. Most lenders also want the property to have been at least 90 percent occupied for the last 3 months before approving the loan application.
Applying for a commercial mortgage does not have to be a complicated task. As long as you put together a constructive rental structure, a year by date income statement, photos of the property, and purchase agreement, there is no reason for your application to get rejected. However, before you start searching for lending companies, you should be aware of the interest rates that are on offer.
The current rates for apartments are low, just like the residential home mortgage rates. You can get a fixed interest rate from 3 to 30 years ranging from 4 to 6 percent. As the apartment building is the main source of collateral, it is not classed as high risk for the lender.
As long as your loan package meets the basic requirements, you can get the financing you need. As the lending industry is quite unpredictable in today's economic environment, you should do your research and put together a good portfolio. There are many reputable online lending companies that offer commercial loans to investors. Take the time to compare their rates before applying.
John Lydecker, Brand Manager, Apartment Loan Store