This is a loaded topic. While there are some similarities, there are also some major differences. When talking about multifamily, that means residential property with more than 4 legal units. Now, let’s get down to the gritty details.
- Qualifying. If you’ve ever gotten a residential loan, you know there is a plethora of information you will be asked to provide. The lender will ask for everything from paystubs to why you deposited a $1,500 check in your bank account. It goes far beyond that but we’re not here to complain about what a royal pain residential financing is. When getting a multifamily loan, we look at what we call “global cashflow”, so we look at your sources of income, but put significant emphasis on the properties cash flow for qualifying. We will still request bank statements and often times tax returns but we don’t need pay stubs, we don’t care whether your cash is in a personal or business account, our credit score requirements are much more flexible and not tied to your interest rate and we don’t have same seasoning requirements on your cash in the bank.
- Prepayment Penalties. These are pretty standard with multifamily. I have a whole post on prepayment penalties here.
- Loan-to-Value. Multifamily loans have a maximum LTV but we qualify based on cash flow which means that while the maximum LTV allowed may be 75%, the property may not cash flow enough to support that. Especially in southern California, other coastal areas and large cities the loan amount is generally limited by cash flow (but also has more opportunity for appreciation AKA equity building).
- Closing costs. The closing costs are generally quite a bit higher. The appraisal cost is higher, you may have to pay your bank and/or broker points, the processing fees to the lender are generally higher. Total closing costs are generally 1-2% of the loan amount (or a bit more).
- Locking in your interest rate. Once you’ve provided your broker or lender with all the information they need to determine what you qualify for, we issue a Letter of Interest or a Term Sheet. Once you sign that, you’ll be asked to give a deposit to start ordering all third-party reports (i.e. escrow, title, appraisal and possibly an environmental and/or engineering report). At that time, you typically have an opportunity to lock in your interest rate. The rate lock period varies from 60-90 days and you are usually asked for a deposit of 1% to lock the rate which is credited back at closing. It is super important to know that once you lock, this deposit will become non-refundable if you cancel the loan. It is also important to know that the Letter of Interest or Term Sheet does not mean you are approved, it is simply what it sounds like: the lender is interested in doing your loan but isn’t promising anything. If the lender doesn’t perform on the terms presented, the deposit is refundable minus any third party costs incurred.
- Fixed term. Once you step into the multifamily game, you can say bye-bye to a 30-year fixed rate. There are a few 30-year fixed programs out there for large multifamily projects but this is not typical, customary or easy to obtain. Generally, the loan is adjustable or fixed for 3, 5, 7 or 10 years. You can possibly do a 15-year fixed. The big consideration here is that good old prepay – usually the longer the fixed term the longer the prepayment penalty – which means less flexibility for a sale or refinance. You really need to think long and hard about your plans for your property – whether it is a long-term hold or a short-term hold – before deciding which program is right for you.
- Time to close. Unless you are going with private money, there are no “quick closes” in multifamily. The standard closing time is 45-60 days. If you are purchasing a property we have been able to close in about 30 days but this is not the norm. You would also have to provide a full package up front and be very quick to provide all answers or additional paperwork needed in short order.
- Location matters. Lenders are much more concerned about the location. Even in a big city, a lender may not be willing to lend on a property in a rough neighborhood. You will also have less financing options and less competitive financing options in less populated or less desirable areas. There will be fewer lenders willing to lend and the ones that do will often have higher interest rates, lower LTV’, reduced amortization schedules and more stringent qualifying guidelines.
- Disclosures. I am not even totally familiar with all the residential guidelines and disclosures these days. There have been so many changes but what I will say is that multifamily, or any type of commercial loans, are not regulated the same as residential. There is no 3-day waiting period, no RESPA or TRID requirements or anything of the sort. It is considered a business loan which means that the government doesn’t pose these sorts of requirements because it is assumed to some degree that you are a savvy business person with knowledge about real estate or at the very least will hire a professional to guide you through the process.
So, there you have it. This is not a conclusive list (this post would be much longer) but these are the major points. One major benefit of hiring a broker is that we will walk you through the process, show you the ins and outs and properly present your package to secure the best possible financing solution based on your specific goals.
I will get into more detail in future posts about specifically how we qualify loans but I don’t want to scare you away or cause major brain damage all in one sitting. More to come! Let me know if there is anything you would like more detail on. I love providing value!!