Is 100% Financing a Good Idea for an Apartment Building Loan?

  • An apartment building loan might help you buy a multi-family property to make money. These loans are not the same as mortgages; they have distinct terms and conditions. In reality, an apartment construction loan is more like a commercial loan. When you apply for rehabilitation loans in the future, for example, you'll be negotiating the amount of additional revenue you'll be able to bring in. Because your apartment complex is a company, you should base your financing selections on what will be lucrative in the long term.

    Eligibility for Federal Guarantees

    The interest rate you obtain on your loan is the most important factor impacting your profitability in terms of your loan contract. Your interest rate will be determined by a variety of factors, some of which are detailed here. One important consideration is if you are eligible for a government loan guarantee. It is less hazardous for your lender and less expensive for you when your loan is insured by the federal government. Some multi-family residential properties that fulfil the FHA's requirements are guaranteed. FHA loans frequently need lower down payments than private loans. To be approved, you will most likely need to put down at least a 3-5 percent down payment. If you qualify for a guarantee based on other factors, try to save money to satisfy the down payment criteria as well.

    Loan Limits Exceed Standards

    Every year, the federal government establishes lending limit standards. The government establishes one restriction for single-family residences and another for apartment structures. When you borrow more than this amount, you're getting a "jumbo loan." For lenders, jumbo loans are extremely hazardous, and they will always cost a borrower more than a loan that falls within the maximum rules. If you go with 100 percent financing, your loan limitations will have to be greater in order for you to buy the house. Putting down a sufficient down payment to keep your loan limitations inside federal guidelines will save you money in the long run. Typically, a 10% down payment on any home is recommended; however, it may be sufficient to only go under the national limit to lower your interest rate.

    Cost of 100% Financing

    Regardless of market norms, there are a number of practical reasons why 100% financing is not a good option. The expense of financing even one dollar of your apartment building acquisition is the most important of these considerations. If your loan has a 6.5 percent interest rate, you will spend around 7 cents extra every dollar to make the purchase. When you multiply this by the total amount of your loan, the simple cost of financing skyrockets. You may cut this cost in half right away by paying for a component of the structure out of your own pocket. Even a 10% down payment, which is advised, will save you hundreds of thousands of dollars over the life of most apartment building loans.