Comparing Apartment Loan Options
A Quick Comparison of HUD, Agency, Bank, and CMBS Apartment Loans
When it comes to financing the purchase of an apartment complex, there are quite a few apartment loan options to choose from, each with their own unique advantages and disadvantages. Still, some multifamily financing vehicles are more common than others, and it behooves investors to understand why. Here is a quick overview of some of the more common apartment loan options, and their key traits:
Bank Loans
For first time commercial real estate investors, banks may be the first option that comes to mind, but they aren’t always the best choice for a multifamily investment. In most cases, your average bank might be willing to do a 70-75% LTV, full recourse loan, with a 5-year adjustable-rate term and a 25-year amortization. Truthfully, that might sound like superb terms for some apartment investors, but it simply isn’t the best option out there. That’s why we caution that investors think beyond their bank and explore their other financing options.
Fannie Mae and Freddie Mac Apartment Loans
Agency loans from Freddie Mac or Fannie Mae are often the best option for borrowers with good credit and a sufficient net worth (i.e. a net worth as large as the loan amount, with at least 10-15% liquid assets). These loans offer incredibly low interest rates, LTVs up to 80% and amortizations up to 30 years. Loan amounts can be flexible to meet all kinds of financing needs. For example, [Freddie Mac’s Small Balance Loan]() program offers loans in amounts as low as $750,000 with fixed and adjustable-rate terms up to 10 years and 30-year amortizations. Additionally, Fannie Mae And Freddie Mac loans are non-recourse (with standard "bad boy" carve outs).
HUD/FHA Multifamily Loans
The HUD 223(f) loan, while even harder to qualify for than an agency loan, is the cream of the crop when it comes to apartment purchase loans. HUD does prefer more experienced borrowers, but they offer LTVs up to 85% and DSCRs as low as 1.18x for market-rate properties, with even higher LTVs and lower DSCRs for affordable properties. For those in need of it, HUD offers its 221(d)(4) loan program for apartment construction and substantial rehabilitation, but these can be significantly more risky for investors. All HUD apartment loans are non-recourse, fixed-rate, and fully amortizing over 35+ years.
CMBS Loans for Apartment Properties
Commercial Mortgage Backed Securities (CMBS) Loans, or conduit loans (as some call them) can also be a great source of financing for apartment investors. CMBS loans often provide lower interest rates and have some of the most lenient borrower requirements. The minimum loan amount for CMBS loans is a little higher than some of its counterparts, generally $2 million+, though exceptions are can be made from time to time. These loans are not serviced by the borrower’s original lender, but are assigned to a separate servicing company. Like HUD and agency multifamily loans, Conduit loans are generally non-recourse.
Final Thoughts
Banks, agencies, HUD, and conduit lenders aren’t the only types of apartment lenders out there, but they’re generally the starting point for many apartment investors. Some of the more advanced options for the more experienced multifamily borrowers include life companies, which offer fixed-rate terms at very low rates, but generally only want highly experienced investors, and hard money loans, which typically have very high interest rates, but can be the only form of financing made available to investors with credit or legal issues. For additional leverage on larger deals, a second-position loan, known as a mezzanine loan, can be layered under a CMBS or bank loan.
Related Questions
What are the differences between conventional and FHA apartment loans?
Conventional apartment loans are typically offered by banks and other financial institutions. These loans are typically offered with a fixed interest rate and a term of 5-30 years. The loan-to-value (LTV) ratio is typically up to 75%, and the debt service coverage ratio (DSCR) is typically 1.25x or higher. These loans are usually non-recourse, meaning that the lender cannot pursue the borrower's personal assets in the event of default.
FHA/HUD apartment loans are offered by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD). These loans are typically offered with a fixed interest rate and a term of 35 years. The LTV is typically up to 85%, and the DSCR is typically 1.18x or higher. These loans are usually non-recourse, meaning that the lender cannot pursue the borrower's personal assets in the event of default.
What are the advantages and disadvantages of taking out an apartment loan?
Taking out an apartment loan can be a great way to finance your purchase of an apartment property. The advantages of taking out an apartment loan include access to long-term fixed rate terms, full amortization, and high leverage. The biggest downside with a loan is that it takes more time to get the financing, but for many, it’s well worth the wait.
The type of loan you choose will depend on your individual needs and goals. HUD loans are some of the most advantageous financing options out there, with few restrictions on borrower experience and flexible liquidity and net worth borrower requirements. Bank loans are another option, with an average LTV of 70-75%, full recourse loan with a 5-year adjustable-rate term and a 25-year amortization. Fannie and Freddie loans are also available, with loan amounts up to $7.5 million and flexible terms.
It's important to explore all of your financing options to find the best loan for your needs. Our multifamily mortgage calculator can help you get an idea of what's on offer for your multifamily financing, and our form can help you get better quotes from lenders.
What are the eligibility requirements for an apartment loan?
To qualify for an apartment loan, you would need to have good credit (660+ is typically expected) and between 25-30% of the total loan amount as a down payment. Additionally, the property itself will need to have a debt service coverage ratio or DSCR, of 1.25-1.30x. This means that the building’s income will need to exceed its annual debt service by at least 25-30%.
For small apartment loans under $1 million, the eligibility requirements are:
- Loan sizes: From $250,000 up to $1 million
- Credit Score: 580 or higher required
- LTV: Up to 80%
- Terms: Up to 10 years or more fixed
- Amortization: Up to 30 years, with interest-only options
What are the typical interest rates for apartment loans?
The typical interest rates for apartment loans vary depending on the loan size and type. For bank loans, fixed rates vary and floating rates are typically 2.30% over LIBOR. For Fannie Mae Multifamily Small Loans, 5- to 30-year fixed-rate terms are available, with floating-rate, partial and full-term interest-only and hybrid ARM options available.
What are the best ways to compare different apartment loan options?
The best way to compare different apartment loan options is to look at the loan-to-value (LTV) ratio, the loan term, the amortization period, and the type of recourse. For example, HUD loans typically offer a higher LTV ratio than bank loans, and agency loans offer a longer loan term than CMBS loans. Additionally, you can use a multifamily mortgage calculator to compare different loan options and get a better idea of the monthly payments and any balloon payment due at the end of the loan term. You can also get help getting better quotes from lenders by submitting your deal information to a loan advisor.