Multi-Family Mortgage Loan Requirements | What Do You Need For a Multifamily Loan

If you’re thinking about investing in real estate, one of the options is multi-family homes. These properties provide you with monthly rent payments from more than one rental unit without the need to maintain multiple properties. Before you start looking for a property to purchase, you need to know the multi-family mortgage loan requirements.

What Is a Multi-Family Loan?

Any property with more than one unit is considered a multi-family property and requires multi-family loan financing requirements. A multi-family property with up to four units qualifies as residential property, while a multi-family property with more than four is designated as commercial property.

Qualifying for a multi-family property is slightly different from qualifying for a mortgage on your personal home, and requirements may vary from lender to lender.

What Type of Loan Can Be Used to Purchase a Multi-Family Property?

There are four types of loans to consider when purchasing a multi-family property as an investment, each with its own specific requirements.

Conventional Mortgage for Multi-Family Property

A conventional mortgage is a permanent loan offered by traditional lending institutions for 15- to 30-year terms. You can use a conventional mortgage to finance a multi-family property with up to four units. Current Fannie Mae requirements and maximum loan limits are:

Two-unit property loan amount of $620,200 to $930,300.
Three-unit property loan amount of $749,650 to $1,124,475.
Four-unit property loan amount of $931,600 to $1,397,400.
Maximum loan to value of 80%.
Minimum down payment of 20%.

It’s important to note that maximum loan limits are regional and can be adjusted for areas in the United States with higher costs of living.

You can expect an interest rate between 4.75% and 7.25% for 15 to 30 years. Loan origination fees are up to 3%, with 2% to 5% in closing costs. You will also need to pay for an appraisal and application fee. The expected funding time frame is 30 to 45 days on a conventional loan.

In addition to these standard requirements for a conventional mortgage, a multi-family property conventional loan also requires a minimum credit score of 680, a minimum debt service cover ratio (DSCR) of 1.25, and six to 12 months of cash reserves available.

Government-Backed Multi-Family Financing

Fannie Mae and Freddie Mac sponsor government-backed multi-family property loans that meet the standards set by the Federal Housing Administration. You have your choice of over five government-backed financing options for multi-family properties, available on both two to four units and properties with more than five units. Current government-backed maximum loan amounts are:

Two-unit property loan amount of $424,800 to $980,325.
Three-unit property loan amount of $513,450 to $1,184,925.
Four-unit property loan amount of $638,100 to $1,472,550.
Five or more units loan amount of $1,000,000 to no maximum.
Maximum loan to value of 80%.
Minimum down payment of 3.5%.

You can expect an interest rate of 4.125% to 7.5% for five to 35 years. You’ll pay an origination fee of up to 1% of the loan amount, with 2% to 5% in closing costs. A prepayment penalty of 1% is included in the government-backed loan, and you can expect the time for funding to be between 60 and 180 days.

In addition, the FHA 223(f) apartment loan can finance up to a maximum loan to value of 87%. Fees associated with the FHA 223(f) apartment loan include:

Minimum average legal fees of $10,000.
Private mortgage insurance at 1% of the loan balance.
Loan origination fees of up to 3% of the amount borrowed.
Closing costs remain at 2% to 5%.
1% of loan balance prepayment penalty.
Minimum FHA inspection fee of 1% of the loan amount.

A government-backed mortgage offers lower credit limits in return for more strict requirements on income documentation, credit history, and cash reserves. Current requirements for properties with two to four units include:

Minimum credit score of 650.
Minimum DSCR 1.25.
Minimum occupancy rates of 85% to 90%.
Minimum cash reserves of three months.
Minimum occupancy time of three months.

For properties with five or more units, the DSCR becomes 1.15. The occupancy rate needs to be 95%, with nine months of cash reserves and a minimum occupancy of six months.

Portfolio Loan

A nonconforming loan option used to purchase a multi-family property is a portfolio loan. Investors can finance between four and 10 properties simultaneously with a portfolio loan. Current Fannie Mae requirements are:

Two to three units loan amount of $100,000 to the maximum varies by lender.
Four-unit loan amount of $638,100 to $1,472,550.
Loan to value of up to 97%.
Minimum down payment of 3%.

Interest rates will fall between 5% and 6% for three to 30 years, with origination fees of up to 3% of the loan amount. Closing costs will be between 2% and 5%, and there’s a prepayment penalty of 1% of the loan balance. Funding time is estimated between 30 and 45 days.

Additional requirements include:

Minimum credit score of 600.
Minimum DSCR of 1.25.
Minimum occupancy rate of 90%.
Minimum cash reserves of nine months.
Minimum occupancy time of three months.

Short-Term Multi-Family Financing

Hard money loans and bridge loans with interest-only payments are used as short-term non-permanent multi-family loan options. Requirements include:

Two or three-unit loan amounts for a minimum of $100,000, with a maximum determined by the lender.
Four-unit property loan amount of $638,100 to $1,472,550.
Loan to value of up to 90%.
Minimum down payment of 10%.

Hard money loans have minimum interest rates of 7.5% to 12%, while bridge loans have minimum rates of 5% to 12% each for six to 36 months. Loan origination fees are between 1% and 3% of the loan amount, with a 1% loan balance exit fee and prepayment penalty. Funding time will be 10 to 45 days.