What Are Multi-Family Loans?

Multi-family loans are used for apartment buildings.

Multi-family loans are used for apartment buildings.

If you and your spouse have been regularly adding to your savings, you might have enough to consider buying an apartment building to earn a better return than the interest rate at your bank. Buying an apartment building might be the right investment for you. You need a multi-family loan for housing with more than four units. Qualifying is different than for the mortgage on your personal home. Make sure you understand the process and requirements before you commit to the purchase.


Qualifying for a multi-family loan might differ from lender to lender. However, a few similar requirements are common to the process. Typically, you need a down payment of at least 25 percent to 30 percent. More will be required if there are areas of concern to a lender, such as a building that needs major repairs. In addition, multi-family loans carry a higher interest rate and fees than traditional, single-family loans. Qualifying for the loan might depend solely on the income the property generates. Or, for smaller buildings, you might be required to qualify on the merits of your personal credit history and score.

Recourse vs. Non-Recourse

Multi-family loans can be obtained as recourse or non-recourse mortgages, depending on lender requirements. If the financial institution has recourse on the loan, it might pursue your personal assets and collateral, if placed, in repayment if you don't pay the mortgage. For non-recourse loans, mortgage companies can take possession of the apartment if you default, but they do not have a claim for your personal possessions, unless you fall under a negligent clause outlined in your loan documents.

Debt Service Coverage Ratio

A multi-family property is usually reviewed as a business operation from a lender's perspective. For an apartment complex to qualify for a mortgage, it must prove income worthy. This determination is referred to as a debt service coverage ratio, or DSCR. If the DSCR is 1, it means you will collect enough rent only to cover your mortgage payments. Typically, lenders require a 1.2 to 1.5 DSCR on a property before approving a loan. Net operating income (NOI), the total after subtracting all expense and vacancy estimates from rent collected, is divided by the annual mortgage payments. For example, an NOI of $150,000, divided by loan payments of $100,000, gives you a DSCR of 1.5 for qualifying purposes.

Documentation Required

To be approved for a multi-family loan, you must provide documentation for you and your spouse and for the property. You'll complete forms detailing your own financial situation. You must submit information about the apartment building, too. Ask the seller to give you copies of the profit and loss statement, tenant list, number of vacancies, signed leases, real estate tax bills, property bank accounts and tax returns and any contracts with vendors, such as the pest control and washing machine service.


About the Author

Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.

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