Apartment Building Financing and Multi-Family Mortgage Guidelines

This article covers commercial financing for apartment buildings and other multi-unit rental properties. 

You can finance rental real estate with a residential mortgage if you buy a 1-4 unit property. But if you want five or more units on your land, you’ll need commercial apartment building financing.

• Apartment building financing is much easier to qualify for than strip malls, industrial buildings, or office buildings. That’s because the income is usually more reliable.
• Apartment building financing can be easier to obtain than a residential mortgage loan. That’s because the borrower’s personal income is generally not a factor as long as the building pays for itself.
• Prequalify  with a commercial mortgage specialist before shopping for an apartment building.

Here’s what you need to know about these residential commercial loans.

Prequalify for apartment financing now. 

Apartment Buildings-Financing

Any property with more than four residential units requires commercial residential financing.

A residential mortgage lender normally does not underwrite or funds commercial loans. However, come loan officers or mortgage brokers do offer this kind of loan.

Commercial loans have fewer consumer protections than residential loans. That’s because commercial borrowers are assumed to have more knowledge about borrowing and residential investment. And if commercial loans fail, borrowers are not being turned out of their homes. Borrower beware.

Most commercial loan officers can originate commercial loans in 50 states since they do not have to be licensed.

There are two types of apartment building financing:

• Mixed used apartment building financing
• 100% residential apartment building financing

These types have slightly different rules for financing.

Financing Mixed-Use Commercial Buildings

Mixed-use apartment buildings consist of residential units and office/commercial units.

• Mixed-use buildings or complexes generally allocate 75% or more square footage to residential units and the rest to offices, restaurants or retail space.
• This is very common in larger cities where there are stores or offices on the first level and apartments in the upper levels.

Daily rental residential units such as hotels or motels are not apartment buildings.

What Commercial Lenders Require 

Commercial residential financing can be a recourse loan or a non-recourse loan. With a recourse loan, the lender requires a personal guarantee from the borrower. That reduces the risk to the lender and can get the borrower better terms for the loan. However, the borrower is at risk if the loan fails.

A non-recourse loans does not require the borrower to personally guarantee the loan. If the loan fails, the lender can take the building but cannot go after the borrower’s personal resources.

When commercial real estate investors seek a commercial loan, lenders are  primarily interested in the property first. Ideally, the revenue from the rents more than covers the mortgage payment, so the borrower’s income is not relevant.

While the income of the guarantor/borrower/operator may or may not be a factor, the credit rating is. Your credit rating reflects your willingness to pay your debts as agreed. In many cases, the commercial mortgage lender will interview the guarantor/borrower/operator.

Apartment Building Financing Factors

The quality of the property drives the amount and reliability of its income. Lenders want to know that the property income will be sufficient to cover the monthly mortgage payment and other operating expenses. Commercial lenders divide buildings into classes A, B, C and D.

Class A apartment buildings

Class A buildings are either built within the last 10 years or have been substantially renovated. High-rise buildings in upscale downtown areas may be over 20 years old.

Class A apartments command the highest rents in town. They feature landscaping, an attractive rental office and/or club building, high-end exterior and interior amenities and are at the top of their market.

Class A buildings boast the highest quality construction and building materials.

Class B apartment buildings

Normally, Class B buildings are less expensive and you can get more units for the same money. However, they rent for less per unit and there will be more repairs and maintenance.

Generally, Class B buildings are less then 20 years old. Renovated older properties can also qualify.

The exterior and interior are somewhat dated and offer fewer amenities than properties in the high end of the market. Rents are lower than those of Class A properties but are still attractive and reliable.

Construction quality is good and there should be little deferred maintenance.

Class C apartment buildings

Generally, Class C buildings are no more than 30 years old. Older properties that have been renovated can also qualify as Class C.

Amenities are limited and the exterior and interior is dated. There is deferred maintenance and the buildings definitely show their age.  Major appliances are usually “original.”

Rents per unit are lower than those of Class B properties and income may be less reliable becaise tenants of those buildings can be less well-off.

Class D apartment buildings

Generally, Class D buildings are over 30 years old. They show obvious wear and their locations are distinctly down-market.

Major systems and appliances are on borrowed time and will soon require replacement. There are no amenities and construction quality is poor.

Rental income per unit is in the lowest category. Tenants tend to turn over frequently. Expect to spend more for repairs, marketing and replacing appliances. Even at a lower purchase price, Class D housing is risky. Income is less reliable and expenses per unit can be high.

Lenders prefer Class A and Class B buildings. Expect to have more difficulty (and to pay more) when financing lower quality apartment buildings.

Loan Requirements for Apartment Buildings

You’ll find that lenders are more interested in the characteristics of the building than they are with traditional residential financing. It’s better to provide all information that the lender could possible need rather than making the underwriter request it piece by piece. You should be able to get most of this information from the listing agent:

• Pictures of the property
• Property description: lot size, year of construction, number of units and existing amenities
• Plans for  new appliances and interior upgrades and community additions like swimming pools, dog parks, playgrounds, countertops, gated security, gyms, etc., and the estimated cost of such additions.
• Map showing the location of the property and nearby competing properties
• Explanation of how competing properties compare with the subject property
• Current rents and future rent changes
• Copies of floor plans
• Source of the down payment and closing costs
• Purchase price and division of closing costs (purchase agreement)
• Loan amount
• Contingency fund amount
• Names of real estate brokers, title companies, attorneys and other professionals involved in the transaction

Your loan officer or commercial mortgage broker can help you come up with a complete loan package to submit to a lender. Make sure you comply with additional requests as quickly as possible to stay on track and close on time.

Apartment Building Mortgage Terms

Apartment building loans are not like traditional residential loans with small down payments and 30-year terms.

• Most apartment building financing programs require a minimum of 20% down payment, 25% down payment, or 30% down payment. It depends on the credit profile of the borrower and the class of the subject property.
• Apartment building mortgage loans are normally balloon loans which you must pay in full ore refinance in three, five, seven or 10 years amortized over 20 years, 25 years, or 30 years.
• Pre-payment penalties are common with apartment building financing and some can be extremely high.
• Many apartment building loans can be assumed by a new buyer.

To learn more about Apartment Loans, please contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

Get a custom mortgage quote for apartment building financing now.