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4 Types of Multi-Family Loan You Can Choose

Looking to take out a multi-family loan? Unsure of what this means, what such a loan entails, and questioning why it could be the right option for you? This is a guide to the different types of multi-family loans available, detailing how they work, what you can expect from taking one out, and basically providing you with absolute clarity when working with such a line of credit.

1. Conventional multi-family mortgage

Let’s start with the basics; a conventional multi-family mortgage is easily the most common type of multi-family loan you’ll come across. A conventional multi-family mortgage is a loan that will typically be used on residential properties with three or more units, such as an apartment block or block of flats.

It is a type of loan usually with less stringent requirements than other types of loans like an FHA, VA, or jumbo loan. The typical down payment for a conventional mortgage is 10% and sometimes less than 5%. The interest rate on the loan can vary between individual lenders but is typically less than 3.5% in some cases. The total sum of a loan varies, depending on the size of the deposit you put down and what building you’re interested in, but it will tend to sit between the £800,000 and £1,500,000 mark, but it can surely go far beyond this for larger complexes.

Loan terms can vary as well and will typically last between 15 and 30 years, depending on the provider and what it is you’re looking for.

Conventional financing is generally the route that most lenders will take when it comes to multi-family mortgage loans. This is due to the fact that loan underwriting is easier with this kind of credit since it’s common practice for lenders to have a lot of experience with the industry.

2. Government-backed multi-family mortgage

If you’re looking for a loan that will give you access to a broader range of funding options, a government-backed multi-family mortgage could be the right option for you. In addition to the fact that the government backs such a loan, this kind of credit also has a particular advantage over conventional financing regarding borrowing.

Multi-family loans backed by the government are known as securitisation. This means that they can be divided into many different pieces, and they can also be used by a wide range of investors, allowing them to access a wider range of funds.

How you access such a loan can vary depending on the providers and their criteria, which will be a little different to a conventional multi-family loan.

When taking out some multi-family loans, you may find such limits on the number of people allowed to live in the housing you are acquiring. So, for example, a property with two to four units may be required, whereas a building with five or more units would require a jumbo loan. Since these larger properties with more units exceed the limits, they are classed as non-conforming loans, making them ideal for this type of loan.

Again, these requirements can vary and may be very specific, so your best bet is to simply look into the loans you’re interested in and look at the most up-to-date requirements for yourself to see whether you’re eligible. Loan applications will also acknowledge your credit score, just like traditional forms of credit.

Taking a look at the details of this loan type, you’ll typically have access to £1,000,000 or more when using these loans, but the minimum loan-to-value (LTV) can vary. It will averagely sit between the 83% and 87% mark. Term-wise, these loans tend to go up to the 35-year mark but can again vary per provider, and the interest rates can be fixed or varied.

Your typical interest rate will sit around 3.5% or above with around 1% fees and a total funding time of 60 to 180 days.

3. Portfolio multi-family loan

A portfolio loan is an exciting line of credit. They are loans that remain held by the mortgaging companies but are not sold on the secondary markets like stocks and shares are.

The main consumers that will use these kinds of loans are small business owners who open a portfolio loan when they can’t access the money of a traditional mortgage or are looking for ways to finance the purchase of several properties but using just one mortgage loan.

So, if you’re a landlord, for example, you can own multiple houses all under one loan, which eliminates the hassle of multiple, potentially confusing loans, each with varying terms, conditions, payments, small print, and potentially varying interest rates. One loan, one undertaker, and one monthly payment.

You’ll usually find these loans have a minimum loan value amount of around £100,000, but the maximum size of which can vary depending on the lender. Some may exceed the £1,000,000 mark. The LTV usually sits between 75% and 80%, but there are examples of loans that can even operate on LTVs as high as 97%. Regarding down payments, you’re looking around the 15% to 20% mark.

With interest rates in mind, both fixed and variable rate interest loans are available, but due to the nature of a portfolio multi-family loan, these can be incredibly affordable, and some loans have even been reported as low as 2.625%. Terms vary in the same ballpark as other loans, usually between two and 30 years, with funding taking place usually within 30-45 days. Credit scores will matter when you’re applying for this kind of loan, and many providers will want to see proof of cash reserves.

You’ll get the best deals if you’re taking out this kind of loan for two to five living units, not more.

4. Short-term multi-family loan

As the name suggests, this kind of mortgage loan is all about managing your property in the short term. That’s not so much the actual purchase of the property but more investing in the renovation, repairing, or otherwise carrying out other costly work, even if it’s a commercial project.

Since these are short-term loans, the maximum term time is typically between three and five years, usually less. In most cases, once the property is finished, the property is then financed with a more conventional loan, is operated as a multi-family unit, or sold for profit. You would typically use a bridging loan as the more conventional loan.

Looking at the average statistics, most short-term loans will start with a minimum loan amount of around £100,000 with no real max, but it will depend on your provider and your own personal credit situation. 

The LTV sits averagely around the 90% mark, meaning you’ll need a 10% deposit for however much you plan to take out, and you can usually get access to your money within 10 to 45 days. The typical term times are between six and 36 months, but again, this will depend on your loan provider, so make sure you’re shopping around.

The problem with these short-term loans, however, is that the interest rates can be quite high, as they usually have most short-term lines of credit. The average interest rate is around 4.65% or above, with fees totalling around 3% of the loan value, so bear this in mind before taking one out.

What are the advantages of a Multi-family Loan?

With knowledge of the types of multi-family loans under your belt, it’s now time to start thinking about why these kinds of loans would be important to you and when you would use them. What are the advantages of using them, so to speak?

Well, there are a fair few to think about.

First and perhaps most importantly, multi-family loans are easy to get a hold of. As we’ve discussed, this kind of loan is the most common one that people will come across. It’s not hard to get a conventional loan, and most banks and financial institutions will provide these loan types as standard. In fact, it’s pretty easy to get a conventional loan, so long as you have all of your documents in order. 

All you need to do is go into your local bank in-store or online, click around for multi-family loans and apply. After the application process, you could pretty much have access to the money you need within a month or two, and in some cases, this can happen pretty much instantly.

Next, consider that multi-family loans are fairly effortless to finance. Yes, it makes sense that multi-family units will be a lot more expensive than buying a single-family home. That’s just common sense. A single unit could cost a few hundred thousand, whereas a multi-family unit of apartments or flats could quickly reach millions.

So it makes sense why you would initially think

 how unfeasible it would be to get the millions needed to make such an investment, but it’s just not the case. In fact, multi-family loans tend to be much easier to get and finance than single-family homes.

This is because, unlike a single-family household, a set of units is far more likely to be producing hard cash flow, which means there’s less risk involved for the lender and, therefore, a greater chance of them getting their money back. Yes, tenants might not pay up, and there might be issues with the process if the property becomes vacant, but it’s a game of statistics.

If you have a single rented unit and the family leaves, your property will be classed as being 100% vacant. If you have ten units, however, and one family leaves, only 10% of the properties are vacant, and these are much better odds than loan lenders love. Basically, multi-family units have less risk than single-family homes, so you’re more likely to get them approved.

Lastly, you can grow your portfolio so much faster than you would when buying and investing in single-family properties. If you’re an investor and you’re looking to build your real estate portfolio quickly, this is a loan that will serve you incredibly well.

Buying a 20-unit apartment block gives you 20 units and is so much more rapid than buying 20 individual family homes. In such a process, buying 20 single units would mean 20 different sellers to work with over time and usually 20 separate loans because there’s no way you’ll be buying that amount of property in one go. 

Instead, save yourself the hassle, and get yourself a multi-family loan with all the units together.

What are the disadvantages of a Multi-family Loan?

While the advantages of multi-family loans are clear, just like all other forms of credit, there are certainly some disadvantages you need to consider before diving in and taking out a loan for over £1 million on the latest apartment block to spring up in your area.

Firstly, these loans can be expensive. The rates of interest are typically higher, so the longer you take out the loan, the more you’re going to end up paying. Many of these loans also have shorter-term times than traditional mortgages, which means you need to pay them off faster.

Secondly, you need more money to get started. Yes, these loans are easier to finance, but most will need a deposit between 10% and 25%. When you’re taking out loans for over £1,000,000, this is a huge potential deposit, and you’re going to need to be able to get the investment from somewhere. If you don’t, then these loans may not be for you.

Finally, the risk can be very high with these kinds of loans. Sure, it doesn’t happen all the time, but if you have problems with your tenants not paying rent, if you don’t have cash reserves, and you start missing payments on your loan since the loan can have such a high value, you fall into hard financial times with severe credit issues.

How do I apply for a Multi-family Loan?

Applying for a multi-family loan is not a difficult process, but you will need to get a few things in order before you even apply for a loan like this.

First, you will need to consider whether or not you have enough equity in the property on which you want to borrow.

Next, you need to consider the interest rate on the loan that you are applying for. You will also need to consider whether or not you have the right documents. At the end of the day, you will need to have the following documents:

Credit report with credit score – Proof of asset – Interest rate – Down payment – Loan amount – Security/gage – Mortgage Insurance – Potential property details (address, photos, age, number of units, and so on) Financial property documentation like rent rolls, utility bills, service contract proof, operating statements Personal financial documentation, like proof of income, cash reserve proof, and recent bank statements.

You’re also going to want proof of deposit. Once you have these in place, your next job is to apply, which will be precisely the same as you apply to any kind of business or small business loan. 

Yes, there’s a bit more documentation to be aware of and to bring, but once you’re all set, it’s just a case of finding the loan and provider that works for you and offers the rates and experience you’re happy with, and then making your way through the application process.

Which multi-family loan type is right for you?

This is a great question, and there is no definitive answer to this. What you need to do is consider the amount of equity that you have in the property that you are applying for. That way, you can decide which type of loan would be best for you or speak to a financial advisor who will be able to help you find the best opportunities based on your personal circumstances.

Either way, here’s a table breakdown of the loan types we’ve discussed so you can see exactly what they have to offer at a glance.

Multi-Family Loan TypeLoan AmountsMaximum Loan-to-Value (LTV)Typical Interest RatesAverage Term TimesTypical Funding TimesUsual Number of UnitsAverage Required Cash Reserves
Conventional Multi-Family Mortgage£500,000 to £1,500,00080%4.5% – 7.5%15 – 30 years30 – 45 days2 – 4 units6 to 12 months
Government-Backed Multi-Family Financing£1,000,000+Varies3.5%+5 – 35 years60 – 180 days5+ units3 – 9 months
Portfolio Loan£100,000+Varies2.5%+2 – 30 years30 – 45 days2 – 5 units6 months
Short-term Multi-Family Financing Loan£100,000+90%4.8%+6 – 36 months10 – 45 days2+ unitsn/a

What are the multi-family mortgage rates?

Here, you need to keep in mind the amount that you are borrowing and how long you will be taking out the loan for. You will need to know the amount of interest that you will be paying, and you will need to have an idea of how long you will be taking out the loan for.

The mortgage rates can vary greatly, depending on the loan you’re taking out. They can be as low as 3% and as high as 6% or more, it really depends on the loan type, the amount, the term time, and the provider.

What is a multi-family real estate loan?

Multi-family real estate loans are basically the same as the loans we’ve already been discussing, and many investors and loan providers may use the terms interchangeably. These loans allow you to finance the purchase or renovations of properties with two or more units, rather than just a single property where a single-family would live.

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