The Best Apartment Loans for Multifamily Investors in 2019
Agency Loans, CMBS, and HUD/FHA Multifamily Loans Remain Excellent Options
With interest rates incredibly low (as of July 2017), it’s an excellent time to finance or refinance an apartment building. But with so many apartment financing options on the market, it’s difficult to know which options are the best. Fortunately, we’ve compiled a quick and easy guide to the best types of apartment loans for multifamily investors, including a brief overview of the terms, benefits and risks of each of the most popular types of loans available.
Fannie Mae and Freddie Mac Multifamily Loans
For those who qualify, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac provide a wide variety of apartment loan options. Also known as agency loans, these loans are generally non-recourse, fully assumable, and often offer leverage of 80% or more. Typical terms include:
Size: $1 million- $100 million
Terms: 5 to 30-year terms (depending on the individual product)
Interest Rates: Vary, often between 4% to 5% (as of July 2019)
Amortization: 30 years
Maximum LTV: 75% — 80%
Minimum DSCR: 1.25x
Recourse: Non-recourse with standard carve-outs
Rate Lock: 30 to 180-day rate locks available (depending on the individual product)
Prepayment Options: Step downs and yield maintenance.
Minimum Credit Requirements: 660–680 FICO
Net Worth Requirements: Principals should have a combined net worth of at least 100% of the loan amount (not including retirement accounts), with liquidity of 10% of the loan amount.
While conventional apartment loans may be the bread and butter of Fannie and Freddie’s multifamily business model, both agencies also provide a wide variety of other financing options, with specific products for affordable and Section 8 housing, senior living/healthcare facilities, cooperative apartments, student housing, and other property types.
CMBS Loans
CMBS loans, also known as conduit loans, are another excellent source of apartment financing and are generally much easier to be approved for than agency loans. Unlike Fannie Mae and Freddie Mac, which put a significant emphasis on borrower credit score, net worth, and liquidity, CMBS lenders are somewhat more lenient when it comes to these factors. As long as the property can generate a reasonable income (as demonstrated by its DSCR), and a borrower has somewhat reasonable credit, lenders are generally willing to offer financing. Typical terms include:
Size: $2 million+
Term: 5, 7, and 10-year fixed-rate loans (floating rate financing is available but much less common)
Interest Rates: Generally start at 2% over relative treasury
Amortization: 25- 30 years
Maximum LTV: 75%
Minimum DSCR: 1.25
Recourse: Non-recourse with standard carve-outs
Prepayment: Defeasance or yield maintenance
While CMBS is a great choice for apartment financing, these loans can generally finance all kinds of commercial real estate, not just multifamily properties. Other common types of properties funded with conduit loans include hotels, retail properties, office properties, self-storage facilities, industrial parks, parking garages, and even marinas.
HUD/FHA Apartment Loans
HUD/FHA apartment financing is considered the cream of the crop when it comes to apartment loans, and for a good reason. FHA multifamily loans provide between 35 and 40-year fully-amortizing terms, which are generally unheard of in the industry. Rates are competitive, and the HUD 221(d)(4) program, which provides a 40-year fixed-rate, fully amortizing loan term, as well as a 3-year interest-only construction loan (for 43 years total) is, by and large, the best apartment construction loan on the market. HUD’s other main apartment loan program, the HUD 223(f) loan program, is designed specifically for acquisitions and refinances, and provides 35 years of fixed-rate and fully-amortizing financing. HUD multifamily loan terms include:
Size: $2 million+
Term:
- HUD 221(d)(4): 43 years; 40-year, fixed-rate term, plus 3-year interest-only construction loan
- HUD 223(f): 35 years
Interest Rates: 3.10% to 4.10% (without MIP)
Amortization: 35–40 years (fully amortizing)
Maximum LTV:
- Market-rate properties: 85%
- Affordable properties: 87%, 90% for properties with more than 90% low-income units
Minimum DSCR:
- Market-rate properties: 1.17x
- Affordable properties: 1.15x
Rate Locks: 30 to 180-day rate locks are available, for a fee
Commercial Development Limits:
- HUD 221(d)(4): The lesser of 10% of the project’s gross area or 15% of the project’s gross income.
- HUD 223(f): The lesser of 25% of the project’s net rentable area, or 20% of the project’s gross income.
While HUD apartment loans offer some incredible benefits, they can be very difficult to get approved for — even more so than Fannie Mac or Freddie Mac multifamily loans. In addition to having excellent credit and high net worth, HUD usually requires borrowers to have a significant degree of multifamily experience.
Life Insurance Company Loans
Apartment financing from life insurance companies is challenging to qualify for, but those who can qualify can reap a wide variety of benefits, including some of the lowest rates in the industry and terms up to 25 years. In most cases, life companies are only interested in offering financing for extremely high-quality apartment properties, as they are generally very risk-averse. Typical terms include:
Size: $2 million+
Term: 10 to 25-year loan terms (self-amortizing options available)
Interest Rates: Vary, but highly competitive
Recourse: Non-recourse with standard carve-outs
Amortization: Up to 25 years
Maximum LTV: 55- 75% (most loans are capped at 70%)
Minimum DSCR: 1.25x
Bank Loans
Bank loans for apartment properties remain a viable option for some investors, but they often don’t provide the best leverage or terms when compared with CMBS or agency loans. Another downside to bank financing is the fact that it is generally full-recourse, which means that a lender can pursue a borrower’s personal assets should the borrower foreclose on their loans. Typical terms include:
Size: $2 million+
Term: 5–10 years (longer-term loans available in some cases)
Interest Rates: Vary, often around 2.30% over LIBOR for floating-rate loans
Amortization: Up to 30 years (20–25 years is more common)
Maximum LTV: 75%
Minimum DSCR: From 1.20x
Interest-Only Period: Partial-term and full-term I/O loans available
