Help me understand the approval process of a multi fam loan

[Mike Wallace]

I own a 4plex and want to move up to a 10+ unit building.

I have great credit and 2 years professionally prepared tax returns earning 75k+

Can the expected revenue of the property that I want to purchase be calculated into the debt to income % to qualify for the loan?

[Michael Seeker]

For a 10+ unit property, you'll need to find a commercial lender. They're going to require 75-80% LTV and will want to see your income, landlording experience and all of the information on the building in question. Meaning you'll probably need to prepare a financial statement for the property so the lender can verify that you have the proper DSCR (debt service coverage ratio).

I highly recommend picking up the book Commercial Mortgages 101 by Reinhard

[Mike Wallace]

thanks for the response. I will look into that book.

I only have 6 months experience with my 4 unit.

How much experience are they usually looking for?

[Jimmy Moncrief]

Great Question!

I'm an underwriter at a commercial bank and you are going to want to look for a community bank for this type of loan.

Be prepared to pay a little higher interest-rate, but as I like to say don't lose sight of the forest for the tree's.

The biggest thing you can do is to create a spreadsheet showing your cash-flow and respective debt-service and how you can easily pay ALL of your debts with excess free cash flow.

[Michael Seeker]

That will depend on the bank. Your best bet is to reach out to a few local banks and see if you can find one that would be willing to do the loan on the terms you need.

Chances are they would be willing to be a little more flexible on your experience if you've got more money to bring to the table, but these are more case-by-case decisions that can depend on a lot of variables for each particular bank. So you don't really know until you ask. I've also found that commercial lenders will quote you one set of terms, but if you mention another lender had a better rate or lower closing costs, then they may be quick to tweak these.

[Michael Seeker]

Thanks @Jimmy Moncrief - it always helps to get the perspective of somebody who makes these types of decisions!

[Mike Wallace]

Ok this is all good info.

For some reason I was under the impression that I had to show enough income to cover the buildings payment without factoring in any rental income.

[Derek Carroll]

The building will need to support itself and you certainly can use the rental income to qualify. The building will be looked at in isolation and you'll be adding your personal guarantee as additional security. There are no debt to income ratios to worry about here like on a residential mortgage, however, they'll want to see that you have enough net worth and liquidity to get the property through the inevitable tough times.

You also can get away with not being experienced by bringing on an experienced property manager. In fact, you may be required to depending on the bank.

[Daniel Bedford]

Good information from everyone but there are other ways and institutions that specialize in funding project like this. There are alot of variables that have not been taken into consideration ie. reserve account, maintenance, rehab and for a person who doesn't have the experience as an owner you can get a management company to run the day to day operations and you will get a return to owner. The rates and fees are a little higher but the funding institutions that do this on the regular will give you less run around.