How to Nail That 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 financing is a great tool for all real estate investors and professionals, whether old-timers or neophytes. Rates are usually around 4.5 percent to 12 percent and terms usually go up to 35 years.
If you’re searching for permanent multifamily financing for a rental units, these are five helpful tips you can keep in mind:
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. If you know you have options, you will naturally broaden your perspective as to which of them is the most right for you.
3. Lock that interest rate upon getting your loan approved.
While this may sound too easy or obvious, it’s worth the emphasis: lock your interest rate once your application is approved. We all have our impressions as to how the rates will move, but does anybody actually know for sure? If you’ve reached this point of getting approved for financing, your best step is to lock your rate and say goodbye to stress. This way, you can rule out any rate movement risks and proceed knowing what to expect.
4. Know the difference between market rate and affordable rent.
When comparing market rate projects and low-priced (government-subsidized) housing loan programs, you will find that the difference is quite remarkable. Make sure you know the type of tenant who will occupy the property you plan to finance. Experienced multifamily investors know these things like the back of their hand, but newcomers might easily get confused, what with all the subtle differences between renting out market rate and low-cost multifamily properties.
5. Compute for your debt service coverage ratio.
It is important for multifamily lenders to be sure that funds adequate to take care of the debt payments for the loans they finance. 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. Low debt-service coverage ratio requirements start at 1.25 and go up from there. To compute your low debt-service coverage ratio, your NOI or net operating income must be divided by the annual debt service obligation.