By Evan Tarver
Putting together a multifamily deal can be extensive, and if the deal is being financed, lenders will typically want to see detailed information on the borrower as well as the property. If you’re financing a property as part of your deal, you’ll want to make sure you have specific information available for your lender. This information includes personal financial information, experience, property characteristics and rental strategies.
1. Personal Credit Score
Your personal credit score is a number generated using the financial information found in your personal credit report. It measures your overall creditworthiness and lenders often consider it first when deciding whether to approve a multifamily loan. Although it’s not the only factor for multifamily financing, your personal credit score is important because it gives a lender insight into how you handle your finances and how often you pay your obligations.
Your personal credit score is measured from 300 to 850. The higher the credit score the more creditworthy you are as a borrower. It’s typical for credit scores higher than 700 – 725+ to be considered “good” credit. However, in order to get approved for a multifamily loan, the minimum FICO score that most lenders will consider ranges from 650 to 680+.
2. Personal Financial Information
The next thing that lenders want to check is your personal financial information. This includes your income sources, monthly income, bank accounts and other liabilities. Lenders will usually ask for your last two bank statements and transaction history as well as your twomost recent pay stubs.
They do this to ensure that you have the ongoing financial capacity to cover the down payment, lender fees, monthly mortgage, and other expenses without financial distress. Aside from your income, most lenders would also want to check your debt service coverage ratio and debt-to-income ratio to verify financial health.
Debt Service Coverage Ratio
The debt service coverage ratio (DSCR) is a measure of the cash available to pay for current financial obligations. It is used to assess your ability to cover your monthly debt payments with cash on hand, which includes funds in your bank’s savings and checking accounts.
It may also include other short-term, highly liquid investments that are readily available. DSCR is measured by dividing your net income by your total debt service payments. Ideally, your DSCR should be between nine to 12 times your required monthly payment.
Lenders want to see a debt-to-income ratio of around 45 percent to 50 percent. This means that you can only have total monthly debt payments equal to 50 percent of your total monthly income. Outstanding credit card payments, other loans and more can increase your debt-to-income ratio and reduce the amount you can borrow. A high debt-to-income ratio is also a sign of potential financial distress.
3. Multifamily Investment History
Lenders will typically want to see that you have sufficient history owning and/or managing multifamily units. Ideally, you should have at least two to three past projects of similar size and scope under your belt. They also typically like to see that you have used a multifamily loan to finance one of your previously owned multifamily units.
However, there are still opportunities to finance your first multifamily deal with little-to-no experience. Typically, you’ll have to start small. Financing a two-unit residential property where you live in one of the units, for example, would be a multifamily deal that lenders would be willing to finance, regardless of background. What’s more, if pressed for financing, you could look into hard money loans and other types of short-term mortgages with fewer qualifications.
4. Multifamily Property Information
Because the property you are trying to finance will typically be used as collateral, lenders will want to know specific information regarding the property prior to approving a multifamily loan. This includes the property’s size, number of units, condition and more.
Lenders are also normally interested to know how long the building has been occupied and what the occupancy rates are for the past three+ months. The ideal occupancy rate for the past three months ranges between 85 percent to 90 percent. Most lenders won’t finance a multifamily property unless the building has been occupied for at least three months with an occupancy rate of at least 85 percent.
Finally, lenders will want to know who’s going to occupy the building. Most lenders allow investors to live in at least one of the units while renting out the rest of the property. However, it’s common that multifamily loans can’t finance buildings where the owner occupies 51 percent or more of the property.
If you’re therefore looking for a larger property with five or more units, or a property that’s zoned for residential and commercial use, multifamily financing may not be the best option for you. Instead, you should consider apartment loans or mixed-use property loans.
5. Resident Lead Generation Strategy
Another important factor that multifamily lenders sometimes like to know is how you expect to keep the property filled with residents over the long-term. Real estate lead generation plays an important role in keeping your property’s occupancy rate high and your financial distress low. Lenders might ask for your lead gen strategies before they decide to approve your loan.
A few examples of lead generation strategies include:
- Rental platforms—There are a ton of rental platforms that help you connect with tenants by listing your units for rent. These platforms include Zillow, Apartments.com, Realtor.com, Trulia, etc.
- Social media platforms—Tap into your personal network by broadcasting your rental via your social media accounts. You can also find Facebook and LinkedIn groups where people might be looking for a rental.
- Door-to-door campaigns—This includes distributing flyers as well as letting the neighborhood know that your property is open for rent.
- Warm Referrals—It’s possible to find new resident leads by word-of-mouth from friends, colleagues and customers.
When putting together your multifamily financing, lenders will check your personal information to ensure your creditworthiness, financial capabilities, and business experience. On top of that, they will also check the property’s general condition, its occupancy rate, and its ability to produce income. To help, make sure that you have all the necessary information ready before reaching out for a deal.
Evan Tarver is a small business and investments writer for Fit Small Business, fiction author and screenwriter with experience in finance and technology. When he isn’t busy scheming his next business idea, you’ll find Tarver holed up in a coffee shop working on the next great American fiction story.