Ten critical considerations for exploring your small-balance multifamily financing options

When financing your apartment property, picking the right option is critical to your success. Your multifamily financing source should have advantages that align with your investment strategy. What’s important to you? There are more factors than just interest rates or terms that you must consider when selecting a financing source. We’ve compiled a few questions to help you narrow your choices down.

1. Is your property "affordable"?

Many owners overlook opportunities to access competitive financing through Fannie Mae, Freddie Mac, or HUD due to misconceptions about affordability. Affordable housing isn't limited to Section 8 or rent-restricted properties. If you rent to workforce tenants earning 120% or less of the area median income (AMI), depending on the market, your property might qualify, opening doors to significant discounts through small balance multifamily loan programs.

Additionally, green-certified properties or those with planned eco-friendly upgrades can qualify for even more favorable terms.

2. Are you seeking non-recourse or DSCR small multifamily financing?

If putting your personal assets on the line is your concern, then a non-recourse or DSCR loan is the way to go. DSCR (which stands for “Debt Service Coverage Ratio”) loans are based on the cash flow generated by a property, rather than the borrower's personal income.

With a non-recourse loan, you cannot be held personally liable if you default (except for certain carve-outs for ‘bad boy’ acts such as fraud or omission). For example, if you fail to make payments for some reason, the lender can seize the property, but cannot go after personal assets as further compensation.  Fannie Mae and Freddie Mac offer such loans.

3. What’s your hold period strategy?

HUD may be the way to go if you want a long-term mortgage. FHA offers the most extended term of 35 years. Fannie Mae, Freddie Mac, and life insurance companies offer mortgages for up to 30 years (although Freddie Mac may offer up to 35 years, depending on leverage and overall deal risk – contact W&D for more details).

Banks typically offer the most competitive short-term small-balance multifamily loans if your hold strategy is under five years. Fannie Mae and Freddie Mac may also be viable options for a shorter-term hold with prepayment flexibility options.

4. Are interest-only payments right for you?

Interest-only has its pros and cons. It can initially lower your monthly payment, but once the principal kicks in, it has the potential to increase it significantly. All financing sources can provide interest-only options, but banks can be a little more challenging (depending on the institution).

5. Do you need cash-out refinancing options?

Some owners find it beneficial to refinance their property for a larger amount than the current loan balance and use that cash for property improvements or updates. All sources provide cash-out financing options, but life insurance companies are the most conservative on that front.

6. What’s your experience level?

Without a proven track record in the Multifamily industry, it can be challenging to obtain competitive financing. Fannie Mae, Freddie Mac, and HUD typically require multifamily ownership experience but may be amenable to exceptions on a case-by-case basis.

7. What are you looking to do: construct, renovate, acquire, or refinance?

Banks or bridge lenders are generally the best options if you want to renovate. If renovations can be completed quickly and/or are only completed as units turn over, Fannie Mae, Freddie Mac, life insurance companies, and CMBS are also great options.

If you’re looking to construct or redevelop an existing property, banks or HUD are generally the best options. Once construction is complete and a property nears stabilization, agency financing may be a great option.

If you want to acquire or refinance, all options offer competitive lending options. The amount of time it takes to close during an acquisition is an important factor. If you need a quicker turnaround for financing, banks, Fannie Mae, Freddie Mac, life insurance companies, and CMBS would be the way to go. HUD takes a longer time and may not be the best option if a quick close is necessary.

8. How much control do you want over operating accounts and reserves?

Banks generally require depository relationships to lend, so when you get a bank loan, you are typically required to maintain an operating account. There is often a minimum amount that needs to be maintained in the operating account. In cases where the minimum is not met, banks often have the right to increase your interest rate to make up for it.

The other lending sources do not require a depository relationship, but they may require escrows or reserves of some sort. Those terms can be flexible depending on the strength of the deal and nature of the request or leverage.

9. Do you own a specialized multifamily asset such as manufactured housing or affordable housing?

Fannie Mae, Freddie Mac, and HUD have specific programs for some of these specialized asset types and understand these types of properties inside and out. This can eliminate many questions or headaches that arise because the agencies know what to anticipate and how to resolve common issues, saving you time and money.

10. Where is your property located?

Where your property is located can determine which source you should choose. Is your property in the same state as you or the state in which your bank operates? Or do you plan to expand your portfolio beyond state lines? Banks may have restrictions on where they can lend, and if they’re not licensed in the location of your property, they may not be able to help.

Fannie Mae, Freddie Mac, HUD, life companies, and CMBS lend anywhere in the US. Some have different appetites as far as population or market goes. Some lenders are only comfortable lending in the top 25 markets or markets with larger populations. Your lender can provide additional information specific to your property’s location.

Direct vs. intermediary for small-balance multifamily loans

When securing financing, another important decision is whether to enlist the help of a direct lender or intermediary (otherwise known as a mortgage broker). Each option has its pros and cons.

Direct lender benefits

A direct lender is able to work directly with borrowers and can generally approve, underwrite, and fund the loan in-house. Borrowers can access the following financing sources via a direct lender.

• Freddie Mac
• Fannie Mae
• HUD
• Banks

Walker & Dunlop is a direct lender for Fannie Mae, Freddie Mac, and HUD. We have robust relationships with life insurance companies, CMBS companies, debt funds, and even banks.

Intermediary advantages

Intermediaries act as a bridge between lenders and borrowers, helping lenders find new opportunities and borrowers explore a variety of lending options at one time. Borrowers can access the following financing sources via an intermediary.

• CMBS
• Life Insurance

Intermediaries can access Freddie Mac, Fannie Mae, and HUD loans, but they must work through a direct lender like Walker & Dunlop. Some intermediaries may also work with banks to help arrange bank financing.

For more information or to receive a quote in minutes, visit our website.