Introduction
Before investing in a property, it becomes necessary to get yourself acquainted with the types of loans, eligibility, and formalities to be done. To help, in this article, we will discuss how one can finance their multi-family or single-family residence and the critical differences between both. Before that, let us first understand what multi-family and single-family residences are.
Multi-Family Residence
It can be described as a large apartment building containing three to four units. It can come as a duplex or triplex. According to authorities, multi-family property with more than four units will be considered commercial and, therefore, the financing for commercial multi-family residences differs from residential ones.
Single-Family Residence
A single-family residence is a one-unit property meant to house only one family or tenant. It is different from the attached, semi-attached property, and the buying process is similar to purchasing a primary residence.
Financing a Multi-Family Residence
Financing a multi-family residence depends on the number of units. There are usually four kinds of multi-family financing available:
Conventional Loans
Usually offered by traditional lending institutions and banks with terms varying from 15 to 30 years. Conventional loans are generally used to finance multi-family buildings containing one to four units.
This type of financing must meet the loan size requirements and qualifications under the Federal National Mortgage Association rules.
With sometimes fixed or variable interest rates, qualification requirements for a conventional loan can be rigorous, asking for a minimum 680 credit score and 12 months of cash reserves.
Government-Backed
Following guidelines from the Federal Housing Administration (FHA), every government-backed loan comes with its own specifications and requirements. Under this category, the maximum Loan Value (LTV) for loans that start from $2 million can go from 83.3% to 87%, and the term can be a maximum of 35 years. For these loans, borrowers must have a minimum credit score of 580 and a minimum 3.5% down payment. If the down payment is larger, the credit score can go up to 500.
Before considering these types of loans, it is essential to know whether the loan is recourse or nonrecourse, assumable or non-assumable and lastly, understand the minimum occupancy requirements. All of these factors differ depending on the program.
Portfolio Multi-Family Loan
These are loans that are generally taken when a borrower does not qualify for a conventional loan or when they want to finance a multitude of properties on the same mortgage loan.
These loans do not come under the federal guideline and, therefore, can go for a higher loan-to-value, debt-to-income, loan size maximums accompanied by higher fees and interest rates by a portfolio multi-family loan lender.
Portfolio Loans allow a borrower to have large loans, making it the preferred choice for a multi-family residence investor.
Short-term Multi-Family Loan
Being short term, these types of loans involve less money and are most commonly used to cover the renovations cost or a house already in good condition. In some cases, the money given under this category can be sufficient to buy a duplex.
The maximum loan amount given under short term loans is $100,000 for a borrower having a credit score of at least 550.
Financing a Single-Family Residence
Real estate investors looking to invest in a single-family residence can finance their property the same way as funding a multi-family residence containing one unit. Since a single-family residence is much cheaper than a multi-family residence, borrowers mostly use the facility of short-term loans. However, a borrower looking for expensive single-family residences like a Villa can go for a portfolio multi-family loan.
As you research the choices for a single-family rental loan, here are the main types of investment property mortgage categories to examine:
Conventional / Conforming Loans
Down payment is generally a minimum of 25% of the property appraised value. Lower interest rates and fees based on the borrower’s credit score and down payment amount. It is offered by traditional lenders such as national, regional, and local banks, and credit unions.
It has lower interest rates and fees based on the borrower’s credit score and down payment amount. The down payment required is generally a minimum of 25% of the property appraised value. One can potentially apply for up to 10 rental loans, although many lenders place a cap of four loans per borrower.
FHA Financing
It is offered by traditional lenders and mortgage brokers and guaranteed by the Federal Fair Housing Administration (FHA). The required down payment and interest rate for this financing option may be lower than conventional loans, based on the borrower’s credit score.
It may be available purchases, property requiring significant updating, or new construction. Multifamily loans may be used by a borrower who claims one unit as a primary residence.
VA Financing
It is offered by mortgage brokers and traditional lenders and guaranteed by the U.S. Department of Veterans Affairs (VA). The best part about this loan is that there is no minimum down payment or credit score requirement.
This loan is only available to veterans, active-duty service members, and eligible spouses. It is a multifamily loan used by borrowers who live in one of the units as their primary residence.
Blanket Mortgage Loans
Mortgage brokers and private lenders provide these. It allows you to refinance many individual mortgages into a single blanket loan. The down payment, interest rate, and loan conditions differ depending on the kind of property and lender.
It is used to fund several rental units with a single loan. Properties that have been funded with a blanket loan may act as collateral for one another. Borrowers can also arrange a release provision that permits one property to be sold without having to refinance the entire blanket loan.
Portfolio Mortgages
It is offered by mortgage brokers and private lenders for borrowers seeking creative financing. It can be used to finance a single-family rental or multiple homes with the same lender.
The biggest benefit of this loan is that the down payment, interest rate, and loan terms vary and may be customized to meet the investment objectives of the lender and borrower.
It also has flexible loan terms which may also mean higher interest rates and fees, prepayment penalties, and shorter loan terms requiring a balloon payment at the end of the loan.
Home Equity Loan and HELOCs
A home equity loan is a sort of second mortgage that is used to extract equity from an existing property and is paid out in one single amount to the borrower.
HELOC (home equity line of credit) is a credit line secured by the equity of an existing property that the borrower can access at any time.
When compared to long-term, cash-out refinancing, interest rates and costs may be greater.
Both home equity loans and HELOCs are returned to the lender on a monthly basis, with a set interest rate and loan period.
Depending on the borrower’s and lender’s criteria, up to 75 percent of the accumulated equity may be borrowed.
Self-Directed IRA
It is a type of retirement account structured like a conventional or Roth IRA. Funds must be transferred from an existing IRA to a custodian who handles self-directed IRA (SDIRA) accounts. Investors can then direct how their retirement assets are invested.
Income must be retained inside the self-directed IRA, and there must be enough cash in the IRA to cover operational expenditures and capital enhancements.
Seller Financing
Owners adopt seller financing to receive interest money from the buyer by acting as the lender. It is given by sellers who own a property outright. As an alternative to a standard 1031 tax-deferred exchange, seller financing can be utilized to decrease the lump sum capital gains tax payment by paying the tax as part of each borrower payment received. Down payment, interest rate, and other loan parameters can be negotiated to match the seller’s and buyer’s investment goals.
Daniel Borrero, Jr.
USALandVentures.com
Real Estate Investor since 1989