Buying overview -> Multifamily and commercial

Multifamily and commercial

The financing process and loan programs for multifamily, commercial, or
mixed-use properties are very different than those for residential properties.

Multifamily is any residential rental property with five or more units. Commercial properties run the gamut from office buildings to warehouses to fast food outlets. Mixed-use property combines commercial and residential uses, for example a storefront with apartments upstairs. The primary sources for these loans are local, regional, and national banks, life insurance companies, and commercial mortgage brokers.

Few residential loan officers have the experience, knowledge, and contacts to competently broker a commercial mortgage. However, a residential lender or commercial real estate broker may be able to refer you to a good commercial lender. Private money loans may also be an option for a difficult-to-finance commercial property.


One difference between commercial and residential financing is in qualifying: there is no such thing as a ‘preapproval’ for a commercial mortgage. The primary criteria for commercial or multifamily loan approval is debt service coverage ratio, a measure of a property’s ability to sustain its debt based on cash flow. To calculate the debt coverage ratio you need to know the annual net operating income, the property’s total income less operating expenses. Dividing that by the property’s annual debt service, the total of interest and principal paid on the property’s loans during the year, will give you the debt service coverage ratio. Depending on the lender, loan program, property type, and other factors a debt service coverage ratio of at least 1.2 is usually required.

Another difference is the required down payment. Commercial and multifamily properties are usually priced according to their cash-flow, or projected cash flow, and maximum loan amounts are determined by debt service coverage, a measure of cash flow. On a commercial loan a down payment of greater than 20% will usually be necessary to bring the mortgage payment down to a level that will be covered by the property’s cash flow.

If you have questions on commercial financing, please let me know.