Often considered to be an investment, purchasing an apartment or multi-unit building usually requires the financial assistance of a mortgage loan. Before seeking financing, borrowers should determine if their property is classified as a true apartment building.
Generally, structures that contain more than four units (or residences) are considered to be a commercial property, however other factors may influence exactly how the property is financed.
The majority of commercial apartment buildings are financed through Fannie Mae, which is provided through a nationwide network of Delegated Underwriting and Servicing supplied by numerous mortgage lenders.
Apartment or commercial property financing also has its own type of funding and underwriting rules, which typically differ from a traditional home mortgage.
Types of Apartment Loan Programs
Similar to traditional home mortgages, apartment programs are offered with both fixed and variable rates. A fixed rate mortgage means that the rate remains the same throughout the life of the loan, whereas a variable rate loan will start low but then increase through time.
Several program structures exist for those seeking an apartment loan mortgage, which include:
- Fannie Mae Enhancement, Fixed and Floating Rate
- Freddie Mac Enhanced Structures
- Non-Rated Financings
- Collateral Reserve based credit enhancement structures
- Structures secured by an insurance policy
- 501(c)(3) Financings
- New Construction
- Acquisitions and Rehabilitation Financings
- Rated Transactions based on real estate
- REIT Secured Financings
How To Qualify for an Apartment Building Loan
Before determining if the structure qualifies for an apartment building loan, consider which properties fall under the category of a “commercial apartment property”:
- Apartment building with 4 or more units
- Can include mixed-use (commercial and residential space)
- 80% of the space must be used for residential purposes
- Building grade of at least a C+
- Cannot be rented daily or week
- No single-occupancy rooms (like rooming house)
- Property must be at least 85% occupied for the past 90 days before making application for financing
Once the property has qualified for apartment building financing, borrowers must assemble documentation to submit along with an application:
- Fannie Mae Form 1003 and personal financial statement (from bank or credit union)
- Property’s current rent structure
- Two years of property’s schedule Es and two years of operating income statements
- Year-to-date operating income statement
- Monthly income breakdown for the past 12 months
- Current exterior and interior photos of the property
- Copy of the purchase agreement
In terms of rates, borrowers should shop several lenders to secure the most competitive rate and program to accommodate their needs. Most commercial apartment property rates are somewhat similar to the current mortgage housing rates so take current market conditions into consideration.
Apartment Loan Restrictions
Some rules and restrictions will apply when pursuing an apartment building loan. Since Fannie Mae will most likely provide financing, borrowers should know that Fannie Mae eligible apartment loans are only funded for structures over $1 million. Any apartment building loan under $1 million will not be underwritten by Fannie Mae.
Additionally, borrowers must form a single asset bankruptcy remote entity to take ownership of the property for loans of $3 million or more. Doing this will separate your apartment building loan from other business or personal financial obligations, which provides a higher level of security for underwriting. This prevents the borrower from taking the money provided from the apartment loan and applying it to use for other aspects. This maneuver protects both parties - the lender and the borrower.
Although borrowers are pursuing financing to cover the cost of purchasing a property, apartment loans differ significantly than what is involved in a traditional home mortgage.
However, while they are mainly different, apartment loans do share a few traditional home loan qualities including:
- 80% LTV financing
- 30-year loans (25 year terms available too)
- Must be in good credit standing to qualify
- Second mortgage or equity loans are available
- Loans are collateralized by the property
While some aspects are the same, borrowers find that seeking an apartment loan presents numerous differences. Unlike a traditional mortgage, an apartment loan can be assumed numerous times over the life of the loan. The borrowers personal assets are typically not at risk if the borrower defaults on the apartment loan, so lender recourse is very constrained.
Typically home mortgage fees are reasonable, whereas apartment loan fees can be high--the application fee can run from $4,500 to $7,000 alone. Additionally, borrowers have large prepayment costs--possibly up to 20% of the loan balance. Other penalties apply based on the individual lender and program structure.
Since an apartment building loan falls under the “commercial” category, companies, LLCs, partnerships and trusts can pursue this type of financing. The borrower must also demonstrate a solid history of multi-property ownership before being considered for financing--unlike a first time mortgage homebuyer program.
Additionally, the borrowers must document that he or she possess liquid assets equal or greater than six months of the principal, interest, taxes and insurance on the property.
