Qualifying For Multi Family +5 Loans

21 Replies

I have a question re Freddie Mac and Fennie Mae Loans - Multi Family. or any other Conforming loans.

I just had a chat to a mortgage broker who advised me that to Qualify for these loans the buyer must have minim equity equal or more to the loan amount. That is part of the loan that conforms to GSE (Fannie Mae and Freddie Mac) guidelines.

My challenge is that at this stage, most of my equity is out of the US.

My question is how do you guys go around this?

Much appreciated any feedback on this. 

I'm not a lender, but based on loans we've gotten you'll need the following: 

-Net worth equal to or greater than loan amount

-Post closing liquidity equal to at least 9 months of payments

My partner and one of my guarantors are Australian.  We usually get hit with a small bump to the interest rate for a "foreigner", but other than that its not a big deal.  They are both in the US and have funds here, though. 

Good luck!

Thanks @Andrew Campbell Im a US Citizen and do have some cash in the US but most of my Assets / Net worth is in NZ. 

I may need to start smaller and build it from there. 

This post caught my eye. So if I wanted to get financing on say an 8 unit building. I’d need to have equity in other properties equal or greater than the purchase price ?

My impression and reach search has told me that you need 25% or more cash down. Good credit, property has to have 1.25 DCR or more

And could expect a 3,5,7,10 year period amortized 20-25 years.

Find partners with liquidity who would be willing to sign on the loan. This partner can be huge for your business going forward as liquidity is an extremely powerful tool and often undervalued. 

@Nicholas Weckstein you don't need equity in the deal equal to the loan. You need net worth equal or grater and post closing liquidity of X months worth of PITI payments. X might be different between lenders but I've personally never seen it go below 6 months.

@Joseph Gozlan ahh okay I see. That I understand. I was worried for a second. I thought I had to re write my game plan !

But wait @Joseph Gozlan so my net worth has to say 1 million in order to finance a 1 million dollar property ? It’s not enough to have 25-30% down and the property does well financially ?

The part of having x amount of months expenses liquid in the banks I get.

Originally posted by @Nicholas Weckstein :

But wait Joseph Gozlan so my net worth has to say 1 million in order to finance a 1 million dollar property ? It’s not enough to have 25-30% down and the property does well financially ?

The part of having x amount of months expenses liquid in the banks I get.

 Almost. You need a net worth equal or greater than the loan amount. Not purchase price. 

Local banks will work with you around this, agencies won’t. 

Ah okay so to conform with the lending guidelines it needs to be like that.

I’ve heard that local banks are almost always better.

I’ve been looking into commercial residential acquisitions for a while, I like how it’s treated more as a business.

Thanks for the info !

This thread is timely and insightful. Kudos to the contributors on here so far.

@Andrew Campbell - this is the first i've heard about the 5+ loan qualification: "Net worth equal to or greater than loan amount." Thanks for sharing! Can you please clarify how lenders are defining "net worth?" Is it based purely on total portfolio equity?

Thanks, in advance, for the insight and education

My last conversation with an experience MF lender was on Friday.

I was advised that Net worth could be considered as Equity on your balance sheet. equity includes Portfolio, cash etc.

Also one need 9 months of Cash for reserves for PITI.

Local lender community bank etc often can be more flexible on that.

Fannie Mae and Freddie Mac are conforming loans and are not flexible on these. 

@Spencer H. to calculate your net worth, just google "personal financial statement spreadsheet". There are a million variations but any of it will help you get the idea. 

The gist of it is all your assets less all your liabilities = your net worth. 

This includes all of you cash, real estate, retirement accounts, gold you buried in the back yard... (Assets) and all your mortgages, student loans, car loans, credit card balances... (Liabilities)

Thanks @Joseph Gozlan , I appreciate the reply

The concept and general calculation make sense. The way you explained the calculation above aligns with the method i've been operating with. 

Given how much debate is floating around out there around the "correct" way to measure total net worth... it's helpful to hear examples of any nuances that may be applied in the specific context of 5+ loan qualification

Hadar, I’m curious how this worked out for you. I would have thought overseas accounts would count towards net worth, did they tell you otherwise?

I got a Freddie Mac loan over the summer and in my net worth I included a sizable UK pension (I just provided latest statement). It wasn’t needed as I would have passed the net worth calc without it but this may come up as an issue in a future deal.

Even if your NZ assets aren’t easily valued I would have included best estimate with some backup, worth a shot.

Thanks in advance for any info!

@Hadar Orkibi

For Freddie Mac agency debt foreign investors are fine and usually will not change the rate. That being said the net worth and liquidity requirements for Foreign Investors is networth = 2x loan amount and liquidity = 18 months of mortgage payments instead of 1x the loan amount and 9 months.

If you are a dual citizen or American citizen, you only need net worth = loan amount and 9 months of liquidity. 

@Nicholas Weckstein

I find it interesting that you think local banks are better. What do you mean by that? Having worked with local banks and small balance agency debt I find that in my area local banks are no where near competitive with regards to rate, flexibility, recourse, and interest only. 

They can be more than 100 basis points over an agency loan while being recourse and having similar fees. That being said, local banks have much more flexible lending guide lines and can work with you on tough deals if you have a compelling case for a strong deposit relationship or ongoing business. 

I think somebody who is in multifamily would do well to have relationships across both types of debt, more tools in your tool box if you will. That way you can match the best debt to your deal!

@Michael Manolides very good point.

To be clear I say that based on people I’ve spoken with and research I’ve done. I’m still trying to break into the 5+ unit commercial loan.

I will have around 75k in 2 years. I want to use that to go commercial.
It’s a different beast then residential for sure.
My idea is to use the 75k to finance a property worth x3 as much. I do times 3 so I have more skin in the game rather than 4x (25%) and I feel it would work more in my favor and meet the terms better.
I’d like to find one building or I’d try to finance 2 four plexes together.

My goal with this is to actually have it paid in full at the end of the loan, so 5-7 years. Then cash out refi and keep snowballing.

Just trying to learn as much about commercial as I can. I’ve heard so many diff things. It’s confusing at times.

@Nicholas Weckstein

Makes total sense and in the space of commercial under $750k-$1M you are right that local banks should be your first call. Commercial is an entirely different beast than residential and I am still learning it as well. Best of luck and let me know if you have any more questions!

Thanks Hadar, I thought that would be the case.

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