Is 100% Financing a Good Idea for an Apartment Building Loan?
An apartment building loan assists you in purchasing a multi-family property to generate income. These loans are very different than mortgages; they have different limits and terms. In actuality, an apartment building loan is more similar to a business loan. When you seek rehabilitation loans in the future, for example, you will be negotiating these on the basis of how much additional revenue they can bring in. Because you need to think of your apartment building as a business, you should make your loan decisions based on what will be profitable in the long-run.
Eligibility for Federal Guarantees
The largest issue affecting your profitability in terms of your loan contract is the interest rate you get on your loan. Your interest rate will be based on a number of factors, and some of those factors are discussed below. One key factor is whether you are eligible to get a federal guarantee on your loan. When your loan is guaranteed by the federal government, it is less risky for your lender, and cheaper for you. The FHA does guarantee some multi-family residential properties that meet their standards. Often, FHA loans require lower down payments than other private loans. However, you will likely have to place at least a 3-5% down payment to be eligible. If you are eligible for a guarantee based on other factors, try to meet the down payment requirements as well to save money.
Loan Limits Exceed Standards
The federal government sets loan limit guidelines each year. The government sets one limit for homes and a separate limit for apartment buildings. When you exceed this limit, you are receiving what is called a "jumbo loan." Jumbo loans are very risky for lenders, and they will always cost a borrower more than a loan within the limit guidelines. When you take the route of 100 percent financing, your loan limits will have to be higher for you to purchase the property. Putting down a down payment that can bring your limits under the federal standards will ultimately save you money on the loan. Typically, you should aim for 10% down payment on any property; but, it may be enough for you to just get under the national limit in order to bring down your interest rate.
Cost of 100% Financing
Regardless of market standards, there are some practical reasons that make 100% financing a bad idea. Chief among these reasons is the basic cost to finance even one dollar of your apartment building purchase. If you are receiving a rate of 6.5% on your loan, then you are paying about 7 cents more per dollar to make the purchase. When you factor this out over the entire size of your loan, the simple cost to finance becomes astronomical. You can immediately reduce this cost just by paying for a portion of the building out of your own pocket. Even the recommended 10% down payment will save you hundreds of thousands of dollars over the lifetime of most apartment building loans.