Purpose of the Loan
The main purpose of getting a multifamily construction loan is to get funding for building a multifamily property. Many developers may not have sufficient capital to fund the project themselves so they elect to get a loan. Developers will often get a construction loan to build a multi-unit apartment complex or a commercial office building. They may also look to complete the construction of a smaller property such as a fourplex as well. When getting these types of loans, developers may also look to build student housing or hotels.
Construction Loan Terms
Like all other types of loans, multifamily construction loans have certain terms that must be met when getting the loan. In most cases, construction loans for multifamily properties are between 12 and 24 months. With this particular type of loan, the developer or borrower will be obligated to pay back the entire loan balance within one or two years after the project is completed. As soon as the property is built, the borrower will begin to make payments each month like any other type of loan.
Loan Amounts
Most multifamily construction loans are about $2 million. However, there are quite a few more that are well above this amount. The loan amount is the total funding that the borrower receives after applying for it. They will be required to pay back the entire loan balance plus interest. Whenever a developer is seeking to get a construction loan, they will need to reveal to the lender the exact type or project they are looking to complete, the total cost of the project and how much funds they have for a down payment. These factors will determine the actual loan amount that a borrower will receive.
Interest Rates
Whenever you get a multifamily construction loan, the interest rate is one of the major components of the financing. The interest rate is an additional percentage that you pay on top of the principal loan balance. Depending on the creditworthiness of the borrower and the current market, the interest rates will vary. Today, loan interest rates are at an all-time low so you can get a multifamily construction loan at a very affordable rate. Construction loan rates are most often fixed where the rate stays the same throughout the duration of the loan. However, there are some loans where you just pay interest for one year and then pay principal and interest the next year.
Loan to Value Ratio
Another aspect of multifamily construction loans is the loan to value ratio. This is the amount funded in relation to the total value of the property. Most construction loans are 80% of the total value of the project. For example, a developer is planning on building a $10 million apartment complex. The lender will provide $8 million as long as the developer puts down $2 million.
Application Process
When a developer or investor plans on getting a multifamily construction loan, they will need to undergo an application process. This is a situation where the developer will fill out paperwork given to them by the lender to get the loan considered. On this application, the developer provides the cost of the project based on contractor estimates, the developer’s total assets, total income, vacancy rate and projected revenue. They will also have their credit evaluated in order to receive the loan. If approved, the developer receives the funding within a few weeks like most other types of real estate loans.
