Qualify for an Apartment Building Loan
What would you need to provide to us in order to obtain a Letter of Interest or something similar to a Pre-Approval letter? How to qualify for an apartment building loan? Some of the most popular non-recourse loans are offered through the Government Sponsored Entities (“GSE”). This would include Fannie Mae, Freddie Mac, and HUD. Other non-recourse lenders would include Conduits also known as Commercial Mortgage Backed Securities (“CMBS”). All of these lenders, GSE and CMBS securitize their loans and sell off parts of the loan pools as rated and unrated securities. This requires a certain level of underwriting consistency. As a result, these lenders have general underwriting guidelines that we can use to determine if your particular loan request would likely qualify for an apartment building loan under one or more of these lenders programs.
Lenders that retain and hold their loans are known as portfolio lenders. This would often include banks, credit unions, insurance companies, REIT, and pension funds. Each of these lenders has unique underwriting requirements.
Generally, Insurance Company lenders are looking for the higher quality properties (e.g. less than 10-years old). Banks generally require all or partial personal recourse. Some banks will consider non-recourse terms when the loan to value drops below 60%. With recent changes in some of the regulations affecting Credit Unions, they can now offer non-recourse loans. While credit unions have the regulatory ability to originate non-recourse loans most require some form or recourse, unless the loan to value falls to the 50% to 60% range, then it is lender specific.
While Fannie and Freddie can offer loans as low as $750,000, they usually only consider qualify for an Apartment building loan below one million when tied to another loan or a large client relationship, otherwise, you should expect the loans to start at one million dollars. HUD can also, originate loans at this one million level, however, due to complexity and costs, we recommend using HUD for loans in excess of three million. Upper limit is not generally a problem as loans in excess of $100 million are available.
When purchasing a single family to be used as your primary residence the home lender can review your credit score, debt and asset ratios as well as analyzing your debt to income ratios. Many components fit into the picture such as stability of employment. The property being acquired is not generally expected to provide any net income that could be used to repay the debt. So, the lender looks long and hard at the source of repayment, your reoccurring income from your job to determine if you can qualify for a loan of $X dollars. When buying and financing an apartment complex, to qualify for an apartment building loan most of the same factors used in qualifying for a home loan are used, PLUS the net income from the subject apartment complex. The net income the subject apartment property is expected to generate is of the most importance. This is why lenders simply cannot issue a Pre-Qualified Letter until they underwrite the subject apartment property.
Some lenders have specific underwriting requirements. For examples some lenders (not all) require a credit score of not less than 650. Fannie Mae and Freddie Mac like to see liquidity post-closing of an amount not less than 9 months principal and interest payments of the new apartment loan in unencumbered liquid assets (combining all principals liquidity). Fannie and Freddie do not take a pledge of these liquid assets (e.g. marketable securities, savings accounts, cash value in life insurance, bonds), they will sometimes ask for evidence you have these assets. Most of the recourse lenders do not have these specific underwriting requirements. CMBS lenders, life company, REIT, Banks, Credit Unions and Pension funds will each have their specific underwriting criteria. It is our job as an expert in this field to know what lenders’ loan product would be the best option for you.
When it comes to length of the term HUD offers the longest term and amortization. For ground up construction, you can obtain a loan term equal to the construction period, plus 40-years. For the refinancing or acquisitions of existing properties, HUD offers term and amortizations schedules of 35-years. Fannie Mae, Freddie Mac, and CMBS routinely offer 30-year amortization. Only Fannie Mae offers fixed rates of 30-years. The most common term or balloon note period is 10-years with a 30-year amortization for Freddie Mac and CMBS.
Some banks have specialty niches for apartment building loan offering fixed 10-years, floating rates or a 10-year term with 25-year amortization with rates that adjust in five years.
Prepayment penalties come with the loan on most loans with fixed rates of 10-years or longer. You can end up with a pre-determined fixed step-down prepayment penalty such as 5% year one, 5% year two, 4% year three, etc. Or you could end up with a Yield Maintenance to US Treasuries. Read more about yield maintenance by following the link: https://www.investopedia.com/terms/y/yieldmaintenance.asp
Conduits/CMBS use yield maintenance and Defeasance. If defeasance is the prepayment method you do not actually pay the loan off. The lender accepts a series of US Treasury notes and bonds sufficient enough to continue to make the monthly scheduled loan payments by cashing in the US Treasury instruments. Thus this is a substitution of collateral- US Treasury instruments are substituted for the real estate mortgage in return the lender will release of all collateral and cancellation of any person guarantees if any. We use the following website to estimate the prepayment penalty for a loan subject to defeasance. https://www.defeasewithease.com/
Normally, a lender will provide slightly better interest rates on the loan with the most unfriendly prepayment penalty. You might save money by going with yield maintenance over the step-down prepayment.
HUD can advance up to 83% – 85% on most loans, Freddie Mac and Fannie Mae can advance up to 80% for acquisition, 75% for refinancing. The interest rates vary based on a number of factors, which lender, term, loan to value. For examples of some these rates please visit our detailed rate sheet on the website:
- Real Estate Agents marketing package of the subject property being offered for sale. Or if a refinance photos of the subject, property description, address, and amenities.
- Historic operating statements on the subject property. Most lenders would like to see the past two years and a trailing 12-month P&L.
- Current rent roll.
- A copy of the accepted LOI, contract or your targeted loan amount and purchase price if no offer has been accepted.
- We will need to understand your plan to hold the property. Is this a long-term investment, a flip or a property to be repositioned, stabilized then refinanced?
- Resume on the principals with the focus on real estate investments. Some lenders want you to have four or more like properties under ownership or management. So, please provide details on properties you own and/or manage. This will assist in determining which lenders should be considered.
- Who or how will the property be managed?
- A detailed personal financial statement. We have forms if needed, just ask. Some lenders would like to see the combined net worth of the principals equal to or greater than the loan amount. We will review to determine if there is sufficient liquidity to qualify for the Freddie Mac and Fannie Mae liquidity requirements.
- Some lenders require three years income tax returns and some do not. We normally do not ask for the tax returns until the lender is identified.
- If you have issues in your past such as credit problems please discuss with us up front. We generally do not pull credit reports as this can have a negative impact on your credit score. When the time is appropriate the lender will pull credit and complete background reviews. It is better to discuss issues up front with us before going down the path with a lender. We work for you, not the lender.
In most cases, we can provide a letter from the actual lender indicating their level of interest in the property within two days of receipt of the above items.