Five Useful Tips When Applying for a Multifamily Loan
Multifamily financing is a mortgage involving buying or refinancing large apartment buildings with a minimum of five units and smaller properties with at least two. Multifamily loans are a good option for both veteran and newbie real estate investors and professionals. Terms may extend up to 35 years and rates between 4.5 percent and 12 percent.
If you’re in search of a permanent multifamily loan for rental units, below are five handy tips you should consider:
1. Apply as soon as possible.
Any knowledgeable loan officer and underwriter will always expedite the process, beginning with the inquiry up to the funding. It isn’t the case all the time, but usually, there are problems along the way that lead to delays. For instance, the underwriter may have backlogs to clear or the borrower may have incomplete documentation. Therefore, it’s always best to begin the process early.
2. There are several options.
We just want to be clear about the fact that there are options, from banks to life insurance firms to private sources and more. Knowing you have options widens your perspective as you decide which one is the best for you.
3. As soon as your loan is approved, lock your interest rate.
This may sound basic or perhaps even trite, but as soon as your loan is approved, lock that interest rate. We all have a take on which direction the rates will go, but does anyone really know with certainty? If you’ve come as far as to actually get approved for a loan, your best action is to lock your rate and quit the stressing. This frees you of worries over risky rate movements, and move forward knowing your rate.
4. Know what differentiates market rate from affordable rent.
When comparing market rate projects and low-priced (government-subsidized) housing loan programs, you will find that the difference is quite remarkable. Be sure to know the type of occupant who will be renting the property you intend to finance. Practiced investors will find this easy, but less experienced ones could be confused with all the nuances of operating affordable and market rate multifamily properties.
5. Be aware of your debt service coverage ratio.
Lastly, multifamily lenders will always want to ensure that there’s enough money to make the debt payments for the loans they issue. They want proof that the borrower will still have an income outside of what must be paid for the owed money. They need evidence that the borrower still has an income apart from the amount that should be paid for the money owed. The minimum requirement for low debt-service coverage ratio requirements is 1.25 and may grow from there. To know your low debt-service coverage ratio, simply divide your NOI (net operating income) by the annual debt service obligation.