Multifamily commercial lending is completely different than residential lending. Multifamily commercial lenders come in all shapes and sizes, and learning how multifamily loans are structured will open up new opportunities. Before you begin to invest in multifamily properties, it is important that you understand that residential and commercial lending are different specialties, each with their own unique complexities.
Understanding the differences
Multifamily lending has a lot more factors and questions to consider during the prequalification, and additional parties are involved. Those include attorneys, accountants, and property managers. Whereas, residential
loans are more standardized, their terms go up to 30yrs and their lending parameters are publicized. Eligibility and loan terms change drastically; most new investors don’t realize that 30-year mortgages are not typically available for commercial properties. Loan costs associated with a commercial transaction are comparatively higher than residential equivalents. Besides the standard appraisal for residential lending, commercial loans require environmental inspections, market review, detailed cash-flow analysis, tenant-lease assessment and other due diligence items that help the lender determine any potential risk. Commercial loans do not have the same process conformity as residential loans.
Loan Structure
Select multifamily properties can qualify for a 25 percent minimum down payment, but most programs have a 30 percent minimum floor. The most competitive multifamily loans have a fully-amortized 20 year structure, many with a balloon note; in which have fixed rates for the first part of the loan, and then the loan must be repaid in full or extended at the end of the fixed period. Some lenders offer interest-only period during the first part of the loan to help investors maximize cash flow. The entire process for a residential loan from application to close can take 30-45 days, whereas commercial purchase transactions do not have the same process conformity and purchase transactions can close through a short term bridge loan and close as fast as 7 days. Multifamily lenders come in shapes and sizes; your relationship with these institutions is the most important piece the puzzle.
Understanding the difference in Multifamily Lenders
Most banks and credit unions have specialized commercial lending programs, but some of the most competitive capital sources include life insurance providers, commercial mortgage backed securities (CMBS). Houston Private Money Investor loans are becoming increasingly more popular because they provide flexibility in a time when bank regulations and underwriting guidelines are becoming stricter and more unpredictable. Loan amounts and amortizations can be increased/ reduced based on any perceived lender risk due to property type, market concerns or borrower financial issues.
Required Documentation
A multifamily commercial lender will require a detailed cash-flow analysis of the property. Since these are investment properties, review of the historical and anticipated net income is crucial. Determining the actual NOI (net operating income) is important for calculating the borrower’s qualified loan to value ratio and debt service cover ratio, which tells the lender the amount of cash flow the borrower has available to pay current debts. Each lender is different but there are some common requests for example for the property: a current and complete rent roll, historical cash flow documents and a related list of capital expenditures. For the investor or borrower: will need a personal financial statement or 1003, copies of tax returns and a recent credit report. If the borrower is an entity, the lender will need to understand the entity structure, agreement and powers.
Be prepared to answer follow-up questions regarding investment property and local market. You will need to provide Houston Hard Money lenders with detailed overview of the subject property’s rental market, zoning and code compliance, deferred maintenance, tenancy and stabilization, and anything else that will help assess potential loan risk or anticipate issues. If you have ever considered investing in multifamily properties, understanding the intricacies of commercial lending programs will at the very least help you prepare to respond to your lenders requests.
We are Houston’s Hard Money lender; our business is making commercial and residentialhard money loans. However, we also feel a responsibility to help those in need of a loan and we’re available (free of charge) to counsel anyone in need of a loan.If we can't help you ourselves, we'll do our best to help you find someone who can.Please give us a call at 713-682-4400 and ask for Jim, Jeff or Joe Emerson.
