Best Small Apartment Loan Options for Borrowers

Purchasing a multifamily home can be a great way to generate passive income and build wealth. There's a few loan options for borrowers seeking to get started. Multifamily mortgages are available for buyers of small apartments or duplexes with up to four units in order to be considered residential for the purpose of financing. This means that you can buy them with mortgages like those used to buy single-family homes, however properties with five or more units are considered commercial real estate, therefore making the financing different.

While a million dollars isn’t a small number, apartment loans in the multifamily finance industry ranging from $1-7 million are generally considered “small” loans. But in the grand scheme of things, that is comparably smaller to the loans that range from $10 to $30+ million for larger institutional investors. Additionally, small loans are considered the fastest-growing segment of the multifamily financing market.

So what are the best loan options for borrowers? We’re going to break it down here.

Freddie Mac Small Balance Loans

This type of loan is a popular choice for small multifamily borrowers. The Freddie Mac Small Balance loan program, also referred to as the SBL program, range in size from $1-7 million loans, which makes them fall perfectly into the small balance category. These loans offer great flexibility for borrowers by including fixed-rates, floating-rate, and interest-only loan options. There is a variety of options for term lengths as well. It's important to note that SBL pricing and interest rates vary depending on region (Freddie Mac divides the U.S into five regions). The following are typical terms for the SBL program:

Loan Size: $1 million minimum, $7.5 million maximum

Terms: 20-year hybrid adjustable-rate loan with a 5, 7 or 10 year initial fixed-rate period, or a 5, 7, or 10 year fixed-rate loan (partial and full-term interest-only loan options are also available)

Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 10% of the loan amount

Fannie Mae Small Loans

Fannie Mae’s small loan is the most popular option when it comes to small apartment financing. While there are many aspects that this loan program has in common with Freddie Mac SBL, Fannie Mae has a few more features to offer. For example, Fannie Mae Small Loans allow borrowers to utilize 30-year-fully-amortizing loan terms, which means they may not need to refinance their loan before the property is fully paid off. Additionally, this type of loan can be used for manufactured housing communities and housing cooperatives, which SBL typically can’t. Lastly, and more importantly, rates are generally lower in smaller markets when compared to the SBL program, which can be very beneficial for borrowers looking to finance properties outside of major cities. Typical terms include:

Loan Size: $750,000 minimum, $6 million maximum

Terms: 5-30 years fixed-rate terms, with floating-rate, partial and full-term interest-only and hybrid ARM options available

Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 6 months of mortgage payments (principal and interest)

Banks and HUD/FHA Multifamily Loans

We thought it valuable to explain Bank and HUD/FHA multifamily loans, but it’s important to note that these options are a bit less attractive and have some restrictions.

Bank loans are another option for borrowers; however, they usually aren’t the best choice if borrowers can qualify for agency debt (Fannie Mae or Freddie Mac loans).

HUD multifamily financing is a good choice for borrowers, but can be difficult to get especially for smaller borrowers. HUD generally prefers borrowers with multifamily experience and strong financials. For borrowers who do qualify, loans can take around 6 to 10 months to close, as opposed to the 45-60 day closing post-application for Fannie Mae and Freddie Mac loans.

Commercial Hard Money Loans

Commercial Hard money loans are unique in that they are a capital source offered by private lenders to investors looking for fast financing, and they are not offered by banks. These loans are most commonly used by fix-and-flip investors, or rental property investors if they can’t find conventional financing, as the major benefits are speed and flexibility. These loans typically last anywhere from one to three years, and the biggest distinction between commercial hard money loans and other types of loans is that your property secures the loan (asset-based loan). Borrowers don’t necessarily have to have a solid credit history to qualify, however, your debt-to-income ratio, and loan-to-value ratio will be evaluated. The tradeoff for this fast turnaround is that the interest rates and fees are typically higher, due to the risk factor. With that said, these loans are one of the most popular loan programs real estate investors utilize, and can be a great option for borrowers.

When it comes to small apartment loans, there are many financing options available, and it’s important to understand the best way for borrowers to invest in real estate. Here at RCN Capital, we offer short-term and long-term financing options for real estate investors. Whether you’re looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited for your needs. Contact us today with any questions about loan options for borrowers!