Apartment mortgage loan can be a great option for investors looking to purchase multifamily properties. The nuances of this type of financing can be complex, so it’s important to understand the different options available.
The first step is to determine your affordability by calculating the maximum value you can afford. This will help you narrow your search and focus on properties that fit within your budget.
Government-Backed Loans
Government home loans are mortgage loans that are insured by a government agency, such as the Federal Housing Administration (FHA), Department of Agriculture (USDA) or the Department of Veterans Affairs (VA). Although the government doesn’t issue these types of mortgages directly to borrowers, it does provide this guarantee to encourage lenders to offer these products to a more diverse pool of prospective homeowners. This lowers the risk for lenders, and in turn, allows these programs to have more lenient credit score requirements than conventional loans.
Additionally, the FHA loan offers a low down payment requirement of just 3.5% for first-time buyers. This is a huge benefit for a market with rising home prices. Similarly, USDA and VA loans don’t require any down payments at all. Conventional mortgages typically require a minimum of 20% down to avoid private mortgage insurance.
It is important to note that government-insured mortgages are still considered non-conforming mortgages, meaning they don’t conform to the standards set by Fannie Mae and Freddie Mac, which are federally-sponsored enterprises that purchase mortgages from lenders and pool them into pools for sale to investors. Fortunately, borrowers can easily use a Freddie Mac or Fannie Mae lookup tool to determine whether their mortgage is backed by the government. Alternatively, borrowers can ask their mortgage lender to confirm the status of their loan.
Bank Balance Sheet Loans
The type of apartment loan you choose comes down to how well qualified you are and how long you plan to keep the property. Government-backed apartment loans follow guidelines set by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Company (Freddie Mac) and the Federal Housing Administration (FHA). These types of loans are more heavily regulated and take longer to fund.
Bank balance sheet apartment loans aren’t regulated as much and offer higher loan to value and debt to income maximums than government-backed options. However, they also have higher interest rates and fees. Using this type of financing, you can purchase and renovate an apartment complex to quickly flip it for a profit. Typical short-term apartment loan lenders include RCN Capital, which offers different multifamily financing options with funding in as little as 10 days.
When applying for an apartment loan, you should clean up your credit profile and focus on reducing debt-to-income ratios. In addition, you should prepare for large balloon payments that are due at various times over the life of your apartment property loan. This type of financing typically requires a minimum down payment of 20 percent. You should also be aware that jumbo apartment loans often require larger down payments than conforming loans and are more risky for lenders.
Short-Term Loans
Many lenders offer short term loans with a tenure of six months to one year. Loans with a longer duration are considered medium or long terms. These loans are unsecured which means that they don’t require any collateral. They usually carry high interest rates to compensate for the lack of security.
The application process for these loans is often quick and straightforward. Borrowers are asked to provide basic information like employment history, bank account details and form of identification. They are then offered the loan terms including repayment schedule and interest rates. If the borrower agrees to these terms, they can receive the funds in a matter of hours.
Some types of short-term loans include bank overdrafts, where borrowers get temporary coverage at hefty interest rates when their accounts run out of money; credit cards with small credit limits that allow a borrower to withdraw up to a certain amount; and bridge loans, which are typically used during real estate transactions to help close on a property before the seller can transfer title. Most short-term loans are unsecured which may mean they have higher interest rates to make up for the risk of not requiring any collateral.
Jumbo Loans
Jumbo loans are a type of mortgage loan used to finance a home that surpasses the maximum loan limits set by Fannie Mae and Freddie Mac. This loan is meant to make it easier for individuals who are looking to purchase a high-end property. However, there are a few distinct demands that borrowers will need to meet.
For example, jumbo loans typically have higher requirements for credit scores and debt-to-income ratios than conforming mortgages. Your DTI is calculated by dividing your total monthly recurring debt payments—like rent, student loans and credit card payments—by your monthly pre-tax income. This metric helps lenders determine whether or not you have enough cash flow to make your mortgage payment. Conventional mortgages typically allow a DTI of up to 43%. Jumbo loans, on the other hand, may have DTI requirements of up to 45%.
Additionally, jumbo mortgages often require that you have more assets in reserve to ensure you can afford your mortgage. This may include proof of sufficient cash reserves, liquid assets or investment accounts. While the exact amount required varies from lender to lender, you can expect to need several months of reserves in order to qualify for a jumbo mortgage. Having these assets can also help you avoid having to pay for private mortgage insurance (PMI) payments. This is a requirement that is typically included in the mortgage agreement, but PMI payments can also be negotiated with some lenders.