Apartment Loan Terms and Financing Options

Apartment loan terms can vary widely depending on the type of property. Some government backed loans such as Freddie Mac Small Balance Loan program and Fannie Mae Multifamily Loan Program are highly competitive in the current market with lower rates and fees, high debt to income ratios and low minimum down payments.


1. Interest Rates

Interest rates vary widely depending on the type of financing you use to purchase your multifamily property. Conventional apartment loans, such as Fannie, Freddie, CMBS, and traditional bank loan products are typically based off of an index plus a spread.

These loans offer a 30-year fixed rate and up to 80 percent leverage, making them the most common choice for many apartment investors. Government-backed apartment loans, such as HUD and FHA, are also available to help developers build affordable housing projects. These types of loans are nonrecourse, meaning the lender only has the financed property as collateral in the event of default.

Other options for more experienced investors include life company financing and hard money loans, which have a much higher interest rate and require highly experienced and financial strong borrowers. Additionally, a second-position loan known as a mezzanine loan can be used to layer additional capital onto the top of a conventional, agency, or FHA-backed loan. For more information, fill out the form below to speak with a commercial real estate loan specialist and discuss your options for apartment financing.

2. Amortization

Many types of multifamily loans use amortization. This means that instalments begin lower and increase over time to pay off the loan in full. This is often used by people who cannot afford high instalments at the start, as they can work to reduce them over time.

The main types of multifamily financing options include commercial banks, government-backed mortgages, and CMBS lenders. Banks typically offer longer terms and fixed rates for these types of loans, while CMBS and government-backed options provide a higher degree of leverage for investors who are more experienced. Some of these loan options are non-recourse, meaning that the lender can only repossess the financed property and cannot pursue personal assets of the borrower in the event of default.

Many of these loan options require extensive documentation for underwriting purposes, including property management agreements, current lease documents, tax bills, and insurance policy declaration pages. Some of these lenders also require reserves, which can limit an investor’s flexibility on a deal. Other options for more advanced investors include life companies, which are more lenient in their underwriting criteria, and hard money lenders, which can provide additional leverage on larger deals.

3. Taxes

Many apartment financing options have their own specific requirements, including the ability to document income from the property. This is primarily achieved through rent rolls and occupancy rates, which are used to identify potential cash flow issues that may arise in the future.

Lenders are typically more concerned about the property’s profit-generating potential than the borrower’s credit or finances. This is reflected in the metric known as Net Operating Income (NOI), which is calculated by taking gross rents and subtracting expenses. This figure is expected to cover the loan payment and provide supplemental income for owners and investors. Often, this is also documented through property management agreements and tax bills.

4. Insurance

The types of loans associated with multifamily financing are many and varied. Some of the most basic options include bank balance sheet loans, government-backed apartment construction loans (Fannie Mae, Freddie Mac and HUD), conduit lenders and hard money loans. The latter often offer high interest rates but can be the only type of financing available to highly experienced investors with credit or legal issues.

Apartment buildings with five or more units start to be considered commercial property rather than residential and the financing options are less attractive than for duplexes or triplexes. Generally, they require 20% or more down, a debt service coverage ratio of 1.2 times or greater and higher credit scores.

Most types of apartment lending require extensive documentation and underwriting criteria. Among other things, current lease agreements, property management agreements and insurance policy declaration pages have to be submitted. More experienced borrowers and those using Fannie Mae, Freddie Mac or CMBS loans may be able to secure non-recourse financing, where the lender only uses the financed apartment building as collateral in case of default.