Apartment Loan Rates Are a Crucial Consideration for Investors

Apartment loan rates are a crucial consideration for investors. As interest rates rise, multifamily investment activity has slowed and many buyers have stepped out of the market.


Banks, agencies, HUD and conduit lenders offer a variety of options for apartment investors. Some of these loans have higher credit requirements and are non-recourse.

Fannie Mae Multifamily Loans

The Federal National Mortgage Association (Fannie Mae) is the largest player in the multifamily loan market. The company provides a consistent source of financing for apartment buildings with five or more rental units. Like Freddie Mac, Fannie Mae offers its financing through Wall Street conduit lenders that securitize the loans and sell them to investors.

Fannie Mae’s multifamily loan programs are non-recourse and offer 30-year fixed-rate financing with 80% leverage. These are incredibly attractive financing terms for property investors and developers.

In addition to traditional multifamily mortgages, Fannie Mae offers specialized loans for affordable properties. These include the affordable ARM 7-6 and the affordable Structured ARM that are tailored to meet the needs of affordable property investors and developers. Both loans feature maximum LTV allowances of 80%, a DSCR requirement of 1.25x and are assumable with lender approval.

The underwriting criteria for Fannie Mae’s multifamily lending programs are strict. Borrowers must meet certain credit and financial requirements including net worth of at least equal to the loan amount and liquid assets sufficient for 9 to 12 months of debt service. In addition, borrowers must be able to demonstrate experience in the market and property type and have strong operating and asset management capabilities. In some cases, Fannie Mae will also consider a combination of quantitative and qualitative data.

HUD 221(d)(4) Loans

HUD’s 221(d)(4) program is one of the highest-leverage, lowest-cost, fixed-rate, long-term apartment construction loans available today. It is non-recourse and offers a 40-year amortization schedule and interest rate lock at the time of construction completion. These features make this HUD construction loan an attractive option for market-rate apartment developers, especially those with a long-term hold strategy who do not intend to sell their projects once they are stabilized.

HUD 221(d)(4) loans are typically used to finance new construction or substantial rehabilitation of multifamily properties with 5 or more units. This financing is intended to serve both market-rate and subsidized (LHITC or Section 8) apartments.

Unlike traditional bank or pension fund construction loans, these non-recourse loans provide up to 85 percent of the cost of development. They also require lower debt service coverage ratios, which helps to reduce financing risk. In addition to this, a borrower can usually start the HUD process with limited plans and specs, which speeds up the overall time to close.

The DSCR requirement for HUD 221(d)(4) loans is 1.17x for market-rate properties and as low as 1.15x for LHITC restricted and affordable apartments. These stipulations, as well as requirements related to commercial space and Davis-Bacon wage compliance, are important for investors to consider when evaluating the financial feasibility of a HUD project. Nevertheless, this is an option that has become increasingly popular with Tactica’s commercial real estate consulting clients as a way to finance market-rate new construction or property redevelopment projects.

Regional Banks

Regional banks make only a small percentage of apartment loans. But they’re important lenders for many borrowers because they tend to offer non-recourse financing. That’s an attractive feature to a number of investors who don’t want to take the risk of being on the hook for the entire debt if the property defaults.

The failures of SVB and Signature are raising concerns about the stability of smaller banks, and that could make it harder for developers to secure construction loans for new projects or value-add renovations. The turbulence in the credit markets may also slow down new CMBS lending.

That’s because a significant share of the loans at smaller banks are commercial real estate-backed. And those loans are coming due or maturing.

The Freddie Mac Multifamily Loan Program offers some of the lowest long term apartment loan rates available in America. These loans are available to buy or refinance market rate, affordable housing and student housing apartment properties up to 75% LTV. They have fixed rates tied to 5, 7, and 10 year treasury yields plus a margin.

Like the larger banks, regionals made a higher proportion of their loans to apartment borrowers than other commercial real estate asset classes prior to the crisis, but the ratio fell off sharply after that. They’re now increasing loans more slowly than deposits. And that could crimp development, particularly in urban infill markets where too much supply is pushing vacancy rates higher.