Are there Federal Loan Options for Apartment Building Financing?

Apartment building financing requires a loan that is essentially a hybrid between a mortgage and a small business loan. Since the building will be an income source, a small business loan is appropriate. However, the building will be zones as a residential property, and you may even elect to live there, making the loan like a mortgage. These unique loans are available through both private and federal loan options.

Private Apartment Building Financing

You may opt to seek a private lender for your apartment building financing needs. A private lender will be much more flexible than a public lender. This flexibility will allow you to take on more than one financing source, consolidate your loan in the future, and other key advantages. In exchange for this flexibility, though, you will be charged a higher interest rate by going only through a private lender. Private lenders are assuming a lot more risk with your loan than with a loan guaranteed by the government. Whenever a loan is riskier for the lender, the cost will go up for the borrower. The fact your loan is flexible combined with the lack of insurance against default will make this loan very risky and therefore very expensive. Since an apartment building loan can far exceed the average mortgage loan, a high interest rate will cost you thousands of dollars each year.

FHA Apartment Building Guarantees

If you determine that saving money is worth sacrificing some flexibility, you may look into options to guarantee your loan through the Federal Housing Authority. A guarantee simply means the FHA will purchase your loan from the private lender if you default. This makes the loan substantially less risky for the lender. To qualify for this loan, you must be occupying the property, and the property must be less than 4 units. FHA multifamily loans have several key advantages. First, they are available at a lower rate. These rates are always fixed and not variable, providing stability in the long run. FHA loans are also non-recourse. This means, if you do have to sell the building in the case of a default, you will not owe the lender any difference between the sale price and the amount left on your loan. 

SBA Apartment Building Guarantee

Because an apartment building is an income-generating property, your new venture may also qualify under the Small Business Administration. This administration delivers federal business loan guarantees to reduce the cost of financing to you, the new business owner. The SBA is different from the FHA on many levels. One of those levels is the fact the SBA does have several direct loan programs. A direct loan comes straight from the administration, unlike a private loan that is only guaranteed through the SBA. Direct loans are usually the least expensive of all the options on the market. They are inexpensive because they are distributed partially on a need basis. The loans go to individuals who will not otherwise be able to secure funding. If you are a disadvantaged business owner or a minority, you may qualify for these low cost options despite having less than perfect credit.