Multi Family Apartments Mortgage

Multi-family Mortgage is a mortgage loan secured by a residential building with more than 4
apartments. multi-family properties cannot contain any units used for retail or commercial
purpose, although multi-family mortgage is considered a type of c ommercial mortgage
loans. Residential buildings with a retail space on the ground floor are considered
mixed-use buildings.

Multi-family loans are underwritten differently from residential mortgages. Many banks
making residential mortgage loans do not finance multifamily properties. The handful that
make loans for both residential and multi-family properties have a separate department for
each. Majority of multifamily apartments are financed by commercial banks that specialize in
this type of buildings.

Net Operating Income (NOI), or Net Rental Income, is the most important factor in multi-family
financing. The net rental income is determined by deducting all operating expenses, including
vacancy, maintenance, management, taxes, insurance, utility, etc., from gross rental income.
The net rental income is then divided by the Debt Service Coverage Ratio (DSCR), which is
usually 1.25 for multi-family mortgages. What remains is used to qualify for the mortgage
financing. To demonstrate this in numbers, suppose a multi-family building has monthly
gross rental income of $4,000 and all expenses totaling $600. It has a net monthly income of
$3,400. Dividing the net income by the DSCR of 1.25 gives us $2,720. This building can be
financed with a mortgage in which the monthly payment does not exceed $2,720.

To establish rental value, banks use certified appraisers to estimate the area market rent. In
addition, current apartment leases are used to help assess the income potential.

The borrower's credit profile is another underwriting criterion. The loan applicant needs to
have at least fair credit history and credit scores of over 620. Many multi-family building are
purchased with a corporate entity rather than a natural person to avoid possible liability
issues. When a company holds title to the property, the principal's credit is used for loan
qualification.

Another risk assessment criterion banks examine is the loan-to-value ratio (LTV). The LTV is
derived by dividing the loan amount by the purchase price or appraisal value, whichever is
less. Most banks allow a maximum LTV of 70% to 80%. There are "subprime" commercial
lenders that lend up to 90%. These are "hard money" lenders. They often have expensive
closing costs, very high interest rates, and carry unfavorable terms to the borrowers.

Because Multi-family mortgage is a type of commercial loan, it has higher interest rates than
residential mortgages. Most have Fixed Rates for 3 to 10 years then adjusting once every 3
to 10 years. 15-year fixed and 20-year fixed are also offered by some banks. Although
30-year fixed rate mortgage is not popular, to achieve a lower monthly payment, many are
amortized over 30 years with a balloon payment after 15 years.











					Registered Mortgage Broker - NYS Banking Department. Loans arranged through third party providers. This is not a commitment to lend. Loan programs and rates subject to change. Equal Housing Opportunity.