Buying a multifamily home can be an excellent way to earn passive monthly income, expand your investment portfolio, and build equity in a stable asset. Familiarize yourself with the multifamily financing process and mortgage requirements before making an offer on a property!
What is a Multifamily Home?
A multifamily home is a building that contains multiple residential units, such as a townhouse or apartment complex. Multifamily homes hold several different tenants or owners.
How does a multifamily mortgage differ from a mortgage on a single-family home?
The multifamily financing process may vary depending on how many units the property has. Properties with over 5 units may require you to provide additional documentation and meet stricter requirements. These properties are considered riskier than multifamily properties with 4 or fewer units and traditional single-family homes.
What are the Requirements and Qualifications for a Multifamily Mortgage?
If you are interested in purchasing a multifamily home and applying for financing, you may be required to provide the following information and documentation.
- Property Details
The mortgage lender will review the building to see how many units it has. If the property has up to 4 units, it is considered a residential property. On the other hand, if the property has 5 or more units, you must apply for a commercial real estate loan.
- Occupancy Details
The mortgage lender will ask if you intend to use the property for personal use or rent it out and use it as an investment property. The occupancy details may determine the required documentation, loan terms, and interest rate.
- Down payment
Typically, the required down payment for a multifamily mortgage is about 20% of the purchase price. The lender may require a higher down payment because there is more associated risk.
- Credit Score
Your credit score and credit history tell a story about how well you handled past debt obligations. It is crucial to have a good credit score when applying for a multifamily mortgage to show you are a trustworthy and reliable borrower.
- Debt-to-Income Ratio
Your debt-to-income ratio shows how much of your monthly income goes towards monthly debts. Having a lower debt-to-income ratio before applying for a multifamily mortgage may make it easier to qualify.
Reserves refer to liquid cash you have in the bank. A mortgage lender may require you to have a certain level of reserves if you lose your job or monthly income and still need to make your monthly mortgage payments.
What are the Benefits of Buying a Multifamily Home?
Although purchasing the property may be costly up-front, there are many associated benefits to buying a multifamily home.
- Generate Steady Cash Flow
If you are purchasing the property as an investment property, you will have the opportunity to rent out the unoccupied units to generate additional monthly rental income. Plus, the monthly influx of rental payments may cover the cost of your monthly mortgage payment.
- Expand your Investment Portfolio
Multifamily financing allows you to expand your investment portfolio faster while only applying for one mortgage for the entire complex.
- Live in the Property
You may choose to live in the property you are buying and rent out the neighboring units to tenants. Living closer to your investment units and tenants may help make the property management process more manageable, especially if you do not rely on a property manager.
- Improve the Property Value
Over time, you can do minor improvements and renovations to add more value and naturally drive up the demand and rental price. In the future, when you’re ready to sell the property, you may make a great return on your investment.
Benefit of Working with GuardHill on Multifamily Financing
GuardHill has extensive knowledge in helping our clients secure multifamily financing for small and large properties. We guide and advise our customers on best practices related to the multifamily mortgage financing process.
Contact us to connect with one of our mortgage specialists to learn more about our multifamily mortgage programs.