What Kind of Loan for a Multifamily Property? Complete Financing Guide
When you're ready to invest in multifamily real estate, one of the first questions you'll face is: "What kind of loan for a multifamily property?" The answer depends on several factors, including the number of units, whether you'll live in the property, your financial profile, and your investment timeline.
Multifamily properties offer tremendous wealth-building potential, but securing the right financing is critical to your success. The good news is that there are more loan options available for multifamily properties than most investors realize. From FHA loans for small apartment buildings to agency financing for large complexes, the key is matching the right loan product to your specific situation.
In this comprehensive guide, we'll explore every major loan type available for multifamily properties, helping you understand which financing option best fits your investment goals.
Multifamily Loan Types: Side-by-Side Comparison
Understanding how different loan products compare across key metrics helps you quickly narrow down your options. Each loan type excels in different areas, so your priorities will determine which product makes the most sense for your situation.
The Critical Distinction: 2-4 Units vs. 5+ Units
Before diving into specific loan products, it's essential to understand the fundamental divide in multifamily financing. Properties with 2-4 units are classified as residential real estate, while properties with 5 or more units fall under commercial real estate. This classification dramatically affects your loan options.
Residential Multifamily (2-4 Units)
Two-to-four unit properties enjoy access to residential loan programs with favorable terms typically reserved for single-family homes. These include:
- FHA loans with down payments as low as 3.5%
- Conventional mortgages with competitive rates
- VA loans for eligible veterans (0% down)
- Standard 30-year fixed-rate terms
The catch? Most of these programs require owner-occupancy, meaning you must live in one of the units for at least a year.
Commercial Multifamily (5+ Units)
Once your property exceeds four units, you enter the commercial lending world. While this means different qualification criteria and generally higher down payments, it also opens doors to specialized financing options designed specifically for investment properties.
FHA Loans for Multifamily Properties (2-4 Units)
For owner-occupants purchasing 2-4 unit properties, FHA loans offer the most accessible path to multifamily ownership. These government-backed loans feature borrower-friendly terms that make apartment building ownership achievable even with limited savings.
FHA Loan Advantages
Low Down Payment: FHA requires just 3.5% down for borrowers with credit scores of 580 or higher. On a $500,000 fourplex, that's only $17,500 compared to $100,000 or more with conventional investment property loans.
Flexible Credit Requirements: Minimum credit scores start at 580 for the 3.5% down payment option, and borrowers with scores between 500-579 can qualify with 10% down.
Rental Income Qualification: FHA allows you to use 75% of projected rental income from the other units to help qualify for the loan. This can significantly boost your purchasing power.
Lower Interest Rates: Because FHA loans are government-backed, lenders offer more competitive rates than conventional investment property loans.
FHA Loan Limitations
- Owner-Occupancy Required: You must live in one unit as your primary residence for at least 12 months
- Mortgage Insurance: FHA loans require both upfront and annual mortgage insurance premiums
- Property Standards: The property must meet FHA's minimum property requirements
- Loan Limits: FHA sets maximum loan amounts that vary by location
For investors willing to live in their property initially, FHA loans provide an excellent house-hacking strategy to build a real estate portfolio with minimal upfront capital.
Conventional Loans for Multifamily Properties
Conventional loans offer more flexibility than FHA for borrowers who don't want to owner-occupy or who have stronger financial profiles. Both Fannie Mae and Freddie Mac back conventional loans for multifamily properties up to four units.
Owner-Occupied Conventional
If you plan to live in one unit, conventional loans typically require:
- 5-15% down payment
- Minimum 620 credit score (680+ for best rates)
- Private mortgage insurance (PMI) if down payment is less than 20%
- Standard income documentation
Investment Property Conventional
For multifamily properties you won't occupy, expect stricter requirements:
- 15-25% down payment
- 620-680+ credit score
- Higher interest rates (typically 0.5-0.75% above primary residence rates)
- 6+ months of mortgage payment reserves
- Rental income can offset debt-to-income calculations
Conventional loans work well for investors with good credit and adequate savings who want straightforward financing without government-backed loan restrictions.
DSCR Loans: The Investor's Secret Weapon
For serious real estate investors, DSCR (Debt Service Coverage Ratio) loans have revolutionized multifamily financing. Unlike traditional loans that focus on your personal income, DSCR loans qualify based on the property's ability to generate rental income.
How DSCR Loans Work
The debt service coverage ratio measures whether a property's income can cover its mortgage payment:
DSCR = Net Operating Income / Annual Debt Service
Most DSCR lenders require a minimum ratio of 1.0 to 1.25, meaning the property must generate at least enough income to cover (or exceed by 25%) the loan payment.
Use our DSCR calculator to determine if your target property qualifies for this financing approach.
DSCR Loan Benefits
No Income Verification: Your W-2s, tax returns, and employment history don't matter. Qualification is based on property cash flow.
Faster Closings: Without extensive income documentation, DSCR loans typically close in 2-3 weeks versus 30-45 days for conventional financing.
Portfolio Scalability: Because DSCR loans don't count against your conventional loan limit, you can acquire multiple properties without hitting financing caps.
Entity Financing: DSCR loans can be made to LLCs, corporations, or trusts, providing liability protection and estate planning benefits.
Self-Employed Friendly: Investors with complex tax returns or business deductions that reduce taxable income often find DSCR loans easier to qualify for than conventional options.
DSCR Loan Considerations
- Higher interest rates (typically 1-2% above conventional)
- Larger down payments (20-25% typical)
- Prepayment penalties are common
- Property must demonstrate rental income potential
For investors building portfolios or those with non-traditional income situations, DSCR loans offer a powerful financing tool that focuses on what matters most: the property's performance.
Typical Interest Rates by Loan Type
Interest rates vary significantly across loan types, reflecting different risk profiles, documentation requirements, and funding sources. While rates fluctuate with market conditions, understanding relative pricing helps you evaluate financing options.
Commercial Loans for 5+ Unit Properties
Once your multifamily property exceeds four units, you'll need commercial financing. While this sounds intimidating, commercial loans offer unique advantages for investors.
Bank Commercial Loans
Traditional banks offer commercial multifamily loans with the following typical characteristics:
- Down Payment: 20-30%
- Term: 5-10 year terms with 20-25 year amortization
- Rates: Variable or fixed, currently 7-8.5%
- Recourse: Personal guarantee usually required
- Qualification: Focus on property cash flow and borrower experience
Bank loans work well for borrowers with existing banking relationships and properties in strong markets.
Credit Union Commercial Loans
Credit unions often provide more competitive rates than banks, especially for smaller multifamily properties. They may offer:
- Lower origination fees
- More flexible underwriting
- Better customer service
- Geographic restrictions (local focus)
Private/Hard Money Loans
When speed matters or traditional financing isn't available, private lenders and hard money sources fill the gap:
- Speed: Close in 7-14 days
- Flexibility: Credit and income issues more tolerable
- Cost: Higher rates (10-14%) and fees (2-4 points)
- Term: Short-term (6-24 months typically)
These loans work best for value-add projects or acquisitions requiring fast closing, with plans to refinance into permanent financing once the property stabilizes.
Agency Loans: Fannie Mae and Freddie Mac Multifamily
For larger, stabilized multifamily properties, agency loans through Fannie Mae and Freddie Mac provide the most competitive long-term financing available.
Fannie Mae Multifamily Programs
Fannie Mae offers several programs for apartment financing:
Delegated Underwriting and Servicing (DUS): The flagship program for properties with 5+ units, offering:
- Non-recourse financing
- Fixed rates for up to 30 years
- Interest-only options
- Up to 80% LTV
- Minimum loan size typically $750,000-$1 million
Small Balance Loans: Designed for properties with loan amounts between $750,000 and $6 million, featuring streamlined underwriting and competitive pricing.
Freddie Mac Multifamily Programs
Freddie Mac's programs include:
Optigo Small Balance Loans (SBL): Targeting loans from $1 million to $7.5 million with:
- Flexible terms (5-30 years)
- Fixed and floating rate options
- Interest-only available
- Up to 80% LTV
Conventional Loans: For larger transactions with full underwriting and the most competitive rates.
Agency Loan Requirements
Agency loans typically require:
- Stabilized occupancy (90%+ for 90 days)
- Property in good condition
- Experienced borrower/management
- Strong market fundamentals
- Third-party property management for larger assets
The trade-off for these favorable terms is stricter underwriting and longer closing timelines (45-60 days typically).
Choosing the Right Multifamily Loan
Selecting the optimal loan requires honest assessment of your situation, goals, and the specific property you're targeting.
For First-Time Multifamily Investors
If you're purchasing your first multifamily property and willing to owner-occupy:
- FHA loans offer the lowest barrier to entry with 3.5% down
- Conventional owner-occupied provides flexibility without mortgage insurance (with 20% down)
- House-hacking strategy using rental income to offset mortgage costs
For Experienced Investors
If you have existing real estate experience and don't want to live in the property:
- DSCR loans for income-qualified properties without personal income documentation
- Conventional investment property loans for smaller 2-4 unit buildings
- Commercial loans for 5+ unit properties with value-add potential
For Large-Scale Acquisitions
If you're targeting stabilized apartment complexes:
- Fannie Mae/Freddie Mac for the best rates on 5+ unit stabilized properties
- CMBS loans for properties that don't meet agency guidelines
- Life company loans for premium properties seeking long-term fixed rates
Multifamily Loan Quick Facts
These benchmarks provide quick reference points as you evaluate different loan programs for your multifamily investment.
Bridge Loans for Multifamily Acquisitions
Bridge loans deserve special mention as they serve a unique purpose in multifamily investing. These short-term loans "bridge" the gap between acquisition and permanent financing.
When Bridge Loans Make Sense
- Value-Add Projects: Properties requiring renovation before refinancing
- Lease-Up Situations: New construction or properties with occupancy below 90%
- Quick Closings: Competitive acquisitions requiring speed
- Credit or Documentation Issues: Temporary financing while resolving qualification challenges
Bridge loans typically carry higher rates (9-12%) and shorter terms (12-36 months), but they enable deals that wouldn't otherwise close and allow time to improve properties for better permanent financing terms.
Construction-to-Permanent Loans for Multifamily
If you're building a new multifamily property from the ground up, construction-to-permanent loans combine construction financing with long-term takeout in a single transaction.
Benefits of Construction-to-Permanent
- Single closing saves costs and time
- Rate lock at closing protects against increases
- Streamlined process with one lender
- Clear path to permanent financing
These loans work well for ground-up development of multifamily properties where the borrower plans to hold the asset long-term.
Common Mistakes to Avoid
Mistake 1: Not Shopping Multiple Lenders
Rates and terms vary significantly between lenders. Always obtain quotes from at least 3-4 lenders before committing.
Mistake 2: Overlooking DSCR Loans
Many investors struggle with conventional qualification when DSCR loans would provide an easier path. If your target property has strong rental income, explore DSCR options.
Mistake 3: Underestimating Reserves
Most multifamily loans require 6-12 months of reserves. Factor this into your total capital requirements.
Mistake 4: Ignoring Prepayment Penalties
Commercial and DSCR loans often include prepayment penalties. Understand these terms before signing, especially if you plan to refinance or sell within a few years.
Mistake 5: Skipping Professional Guidance
Multifamily financing is complex. Working with experienced lenders like Clear House Lending who specialize in this space can save you time, money, and frustration.
Get Expert Help with Your Multifamily Financing
So, what kind of loan for a multifamily property? The answer depends on your unique situation:
- 2-4 units, owner-occupied: Consider FHA or conventional loans
- 2-4 units, investment: Look at conventional investment or DSCR loans
- 5+ units: Explore commercial, DSCR, or agency financing
- Value-add or unstabilized: Bridge loans may be your best starting point
At Clear House Lending, we specialize in helping investors navigate the full spectrum of multifamily financing options. Whether you're purchasing a duplex with an FHA loan or acquiring a 100-unit apartment complex with agency financing, our team can guide you to the right solution.
Contact us today to discuss your multifamily investment goals and discover which loan program best fits your needs. Or if you're ready to move forward, apply now to get pre-qualified for multifamily financing.
Looking for more multifamily resources? Explore our multifamily property solutions page for specialized loan programs, or learn about DSCR financing if you want to qualify based on property income rather than personal income. Use our DSCR calculator to see if your target property meets lender requirements.