5 units and up
Multifamily Loans, 5 to 9 Units
Cross five units and the rules change. The building's income carries the loan, not your tax returns, and the paperwork is about the rent roll.
Four units is the ceiling on residential lending. At five, you are in a different world: the building is valued on its income, the appraisal comes with a rent roll and a commercial opinion of value, and the underwriter cares more about your tenants than your job.
That shift is why a lot of investors stall at fourplexes. It is not actually harder. It is just different, and most loan officers have never done one.
The program
| Property | 5 to 9 residential units |
| Occupancy | Investment, business purpose only |
| Loan size | $350,000 to $2,500,000 |
| Maximum cash-out | $500,000 |
| Products | 30-year fixed, 30-year fixed interest-only, 5/6 ARM, 5/6 ARM interest-only |
| Vesting | You personally, or a U.S. LLC with a personal guarantor |
| Prepayment | Step-down structure |
| Subordinate financing | Not allowed |
How the building has to perform
Minimum DSCR: 1.15.
That means gross rent must be at least 1.15 times the full payment including taxes, insurance and association dues. It is a tougher test than the 1.00 many one-to-four unit programs allow, and it is the first thing to check on any building you are considering.
How the rent is counted:
- Leased unit: the lower of the actual lease or market rent
- Vacant unit: 75% of market rent
- Short-term rental income: not counted at all
That last one matters. If the seller's numbers lean on Airbnb, the loan will not see that income.
Interest-only, and its price
Interest-only is available and it is the obvious way to make a tight DSCR work, because you qualify on the interest-only payment.
The trade: a 5% reduction in loan-to-value. You buy the easier ratio with a bigger down payment. Sometimes that is exactly right. Sometimes it is cheaper to put the money into a better building.
The money you need behind the deal
This is where 5-9 unit deals fall apart, so plan for it early.
- Six months of full payments in reserves. Not three. Six.
- The loan proceeds cannot count toward reserves. It has to be money you already have.
- Assets seasoned 60 days, or fully sourced.
- No gift funds. At all.
- Interested party contributions capped at 3%.
Down payment, plus closing costs, plus six months of payments, all your own seasoned money. Add it up before you write an offer.
What they check about you
Even though the building qualifies the loan, you still get looked at:
- Lowest mid credit score of any borrower or guarantor is the qualifying score
- Classic FICO only. A soft pull will not do
- Tradelines: three reporting for 12+ months, or two for 24+, or one for 36+, all active in the last year. Thin files are declined
- A 24-month housing history is required
- You must maintain a primary residence, with evidence. Investors who sold their house and travel run into this
Some old collections can stay open within limits, and medical collections are generally fine. Judgments and liens that affect title get paid, no exceptions.
Occupancy at closing
- No more than two vacant units, whether you are buying or refinancing
- On a refinance, every other unit needs an executed lease with at least three months remaining
- Rents have to be consistent with the market. A below-market family lease will be questioned
A half-empty building is a repositioning play, and that is a bridge or rehab loan, not this one. Bridge loans.
The appraisal is a project
Expect a full interior appraisal on a multi-unit form, plus a commercial broker opinion of value through a third party. If those two disagree by 10% or more, a second appraisal is ordered.
You will need to supply: the purchase agreement, a map or survey, common area maintenance figures, the legal description, deeds and tax certificate, all leases, the rent roll, site plans, an aerial photo, a floor plan, and an interior photo of every unit.
Start collecting that the day you go under contract. It is the most common reason these files run long.
Ten units and up
Past nine units you are in commercial multifamily, which is a different set of lenders and a different underwrite. I can place those too. Commercial real estate loans.
Related
- DSCR loans for one to four units
- All investor loans
- Run the numbers first in the Passive Income Property Analyzer
Send me the rent roll
Questions people ask
What DSCR does a 5-9 unit building need?
A minimum of 1.15. That means gross rental income has to be at least 1.15 times the full payment including taxes, insurance and any association dues. It is a higher bar than most one-to-four unit DSCR programs, which often accept 1.00.
Can I count Airbnb income?
No. Short-term rental income is not allowed on this program. Vacant units count at 75% of market rent, and leased units count at the lower of the actual lease or market rent.
How many units can be vacant?
No more than two, on a purchase or a refinance. On a refinance, every other unit needs an executed lease with at least three months remaining.
Can I use gift funds or a seller second?
No to both. Gift funds are not allowed, subordinate financing is not allowed, and interested party contributions are capped at 3%. Your down payment and your reserves have to be your own seasoned money.
What reserves do I need?
Six months of the full payment, and the loan proceeds cannot be used to meet it. That is on top of your down payment and closing costs, and it is the number that surprises people most.