Apartment Loans 101

Understanding the fundamentals of apartment loans can be very helpful if you’re looking to invest in apartment buildings because the sellers of many well performing properties will not go for a creative master lease agreement but instead may require a straight sale to which a loan would help you facilitate. In this training, you’ll discover the basics of apartment loans, including how apartment loans differ from residential mortgages, how to qualify for an apartment loan, what apartment lenders like and dislike, the 10 steps to obtaining an apartment loan as well as what apartment loans are available in the marketplace today.

Apartment Loans 101 PodCast Episode

Here’s a summary of what you learned in the video above:

PART 1: Two Ways Apartment Loans differ from Residential Mortgages (1:19)

• 1. Apartment Banks qualify the property first and the borrower second. Residential lenders do the exact opposite and qualify the borrower first and the property second
• 2. Apartment loans have much larger down payment requirements, 20% at a minimum to as much as 40% in some cases, as opposed to many residential loans that may only require 5-10% down.

PART 2: How to Qualify for an Apartment Loan (3:56)

Cashflow

• Annual Net operating income must cover the yearly mortgage payment must be 1.2 times or greater, also known as the Debt Coverage Ratio (DCR).

Collateral

• The property being purchased at or below appraised value as well as a large enough down payment so that the Loan to Value (LTV) of 75% or lower.

Credit

• 660 Fico Score
• No Bankruptcies in the past 7 years
• No short sales or foreclosures in the past 3 years
• No open judgments
• Liquidity, cash in the bank
• Net Worth Requirement

PART 3: What Apartment Lenders Like and Dislike (9:06)

Like

• Solid Cash Flow
• Good Price
• Evidence of Good Operational History (2 to 3 year back records proving the property has already been making money)

Don’t Like

• Poor financial records
• Poorly maintained (larger down payment to mitigate their risk)
• Weak market (high vacancy, plight or poverty)

PART 4: Ten Step Apartment Loan Process (13:34)

The process typically takes 45 days or longer to complete.

Phase 1

• Step 1. Send financials and photos
• Step 2. Complete loan application and review borrower credit
• Step 3. Order appraisal and site inspection
• Step 4. Register loan into lender’s system and lock rate

Phase 2

• Step 5. More underwriting (1 – 2 weeks)
• Step 6. Order termite inspection and title search
• Step 7. Loan commitment (1 – 2 days)
• Step 8. Approval! A letter of commitment (LOC) OR they are going to request more documentation
• Step 9. Finalize closing
• Step 10. Closing and Record Documents

PART 5: Apartment Loans Available Today (19:28)

Where do you go to get a loan?

• Option # 1 – Mortgage Banker: Local small, regional or national bank
• Option # 2 – Mortgage Broker: Works with all kinds of banks

Fannie Mae and Freddie Mac Small Apartment Loan Program

• Planned to lend $60 Billion this year and have already used up over half of the allotment
• 5+ Units
• Minimum $750,000 to Maximum $5,000,000)
• 20% down payment
• 1.25 Debt Coverage Ratio (DCR)
• Low Fixed Interest Rates (5 or 7 or 10 years with a 30 year amortization)
• Interest only payments option
• These are non recourse loans
• 680 FICO score
• No previous experience required if the property is local to you (If you are long distance, you will need previous experience)

That’s Apartment Loans 101