Mortgage Terms & Rates: 4-Unit Property vs 5+ Unit Property
Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Basit Siddiqi CPA4.979 Reviews
Mortgage Terms & Rates: 4-Unit Property vs 5+ Unit Property
1 Reply
- 1yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Basit Siddiqi:
I am exploring whether I want to purchase some 4-unit properties or purchase a large apartment complex.
I wanted to understand, from those with experience, what is the difference in the rates and terms between the two.
How do the terms and rates compare from a 4 Unit property(Conventional Mortgage) vs a 5+ Unit property
Some information that I was hoping to get a difference on was interest rate, loan term, down payment requirement, balloon payment and amount of closing costs / lender fees.
I appreciate everyone providing me answers in advance.Hi Basit
In my experience financing both 1-4 and 5-21 unit properties, the type of financing is not a one size fits all and terms will largely depend on the scenario.
Your traditional 1-4 Unit is pretty straight forward. You can either look into a conventional mortgage, Non-QM, or Bridge loan. Terms are usually 30 year fixed although you can get 5-10 year ARMs for better pricing. Lenders will qualify you either based on your personal income or the property's rental income and expenses. The sales comparison approach will be the preferred method of determining the property's value. Most lenders will follow a standard loan procedure such as disclosing a loan estimate, ordering the appraisal, providing underwriting conditions and getting a final closing disclosure before the loan is ready for signing.
Commercial loan terms and processes for 5+ Unit properties will depend on the type of bank, credit union, or private lender. Majority of commercial lenders offer 5-10 year fixed terms with ARMs or a balloon. You will also see more pre-payment penalty structures, interest-only options for the first couple of years, shorter term loans, and a 25 year amortization. You can also get a 30 year traditional mortgage that is fully amortizing, however the interest rate will be very high. The loan process is not as straightforward. You may need to pay a good faith deposit beforehand, and the lender will examine the property's rent roll, total expenses, total income, credit and your experience to qualify. They may even request your last 3 years of income, net worth, and liquid reserves, to determine your ability to repay the loan. All of this will depend on the type of institution.
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