Important: Refinance your current loan to avoid a balloon payment prior to maturity date.  - Read more.

6 Details to Expedite Your Multifamily Commercial Loan Refinance Transaction


If you need to refinance your current multifamily apartment loan, it’s helpful review and gather some basic information about your current loan before you start the process. Read on for six important points you should be aware of.

1. Know the Current Terms of Your Existing Commercial Loan

What is the current rate and mortgage balance on the existing loan? Is it a fixed or variable interest rate, and when is the maturity date? Does the loan have a maturity date with a balloon payment that is coming due?  Are there any prepayment penalties that will be charged for refinancing the property?  Many FHA loans have a declining prepayment penalty structure with a 2-year lockout followed by 8 years of declining pre-pay of 8%, 7%, 6%, 5%, 4%, 3%, 2%, and 1% (other terms may be negotiated with your HUD FHA approved lender).  Other loans such as Fannie Mae and Freddie Mac have prepayment penalty structures that include yield maintenance. Yield Maintenance is a prepayment penalty that, in the event the borrower pays off a loan before maturity, allows the lender to attain the same yield as if the borrower had made all scheduled mortgage payments until maturity.  The longer the length of time until the loan the maturity date, the higher the penalty.

2. Decide on the Basic Terms of the Commercial Loan You Are Looking For

If you are looking for the highest loan-to-value, longest fixed rate fully amortized term, then the HUD FHA 223(f) refinance is a great option.  The maximum loan-to-value (LTV) is 80% for cash out transactions, 85% for market rate refinance transactions, 87% for affordable transactions, and 90% for 90% or greater rental assistance.  This loan has a fixed interest rate, up to 35 years fully amortizing, not to exceed 75% of the remaining economic life.  If you are looking to hold the property as a short-term hold, Fannie Mae or Freddie Mac may be a better option.  The maximum loan-to-value is 80% for market rate refinancing, and 75% or less for cash out transactions.  The loan terms generally carry a fixed rate of 5,7,10 or 15 years amortized over a period of 20, 25, or 30 years with a balloon payment due at the end of the fixed rate period.  FHA, Fannie Mae, and Freddie Mac are non-recourse however, certain parties may be held personally liable to the extent of losses arising from certain “bad acts” and malfeasance.

3. Find Out the Fees and Expenses for the Commercial Loan Transaction

For a typical Fannie Mae or Freddie Mac transaction the application fee is typically between $12,000 and $15,000 which covers 3rd party reports that include an appraisal, physical needs assessment, and an environmental report.  The legal fees can range from $10,000 to $15,000 depending on the complexity of the transaction.  The origination fee can be up to 3.5% of the loan amount, paid at closing.  The application fee for a HUD/FHA 223(f) transaction is 0.3% due at the time of application.  A mortgage insurance premium (MIP) of 1% is due at closing and an annual (MIP) ranging from 0.25% to 0.60% is calculated on the outstanding principal balance.  The lender and borrower legal fees can be $15,000 to $25,000. The origination fee can be up to 3.5% of the loan amount, paid at closing.  The fees for a HUD/FHA 223(f) transaction are more expensive, but the benefits outweigh the costs of the transaction.

4. Learn the Typical Timing of Each Commercial Loan Transaction

The typical timing for a Fannie Mae or Freddie Mac transaction takes 60 to 90 days from application to close.  A typical HUD/FHA 223(f) transaction can take 4 to 7 months from application to close.  The borrower can often times either speed up or slow down the process based on the flow of documentation that they provide the lender.

5. Understand the Standard Net Worth and Liquidity Requirements of Each Commercial Loan Transaction

For Fannie and Freddie Mac transactions the borrower net worth should be equal to the loan amount requested, and have a liquidity (cash or assets that can easily be converted to cash) of 10% of the loan amount.  Per the HUD 2016 Multifamily Accelerated Processing (MAP) Guide “Principals of the borrowing entity must have, in aggregate, net worth equal to at least 20% of the loan amount and liquidity equal to at least 7.5% of the loan amount. This requirement may be waived for sponsors of subsidized affordable housing properties.”  

6. Gather the Proper Documentation

Prior to your meeting, gather the following documentation and information. Your lender will need these details in order to complete a proper analysis.

  • A brief summary of the proposed multifamily apartment project and the multifamily ownership experience by sponsor(s) and key principal(s)
  • Name, address, city, state, and zip code of the project
  • Year built, unit mix, number of buildings
  • Elevators? Yes or No
  • Maturity date of the existing loan and pre-payment penalties, if applicable
  • Name of the management agent
  • Balance sheets and operating statements for the last 3 years
  • Year-to-date financial statements (these do not need to be audited).
  • Trailing 12-month operating statements
  • Rent rolls for the last 6 months
  • Occupancy history, by quarter, for the last three years
  • Any third-party reports previously completed
  • Copy of the most recent mortgage statement and mortgage note
  • Schedule of Real Estate Owned (REO)
  • Copy of the organizational chart
  • If the project has an affordable component, please include subsidy details

If you are not interested in FHA, Fannie Mae, or Freddie Mac loans for your multifamily apartment transaction, there are several other lending programs available. These include CMBS loans, also known as conduit loans, life company loans and bridge loans. LSG Lending Advisors will find you the best loan program for your business objectives and financing needs.

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