What Types of Requirements Do Lenders Have for Apartment Building Financing?

If you are considering investment in apartment buildings you should be aware of the requirements that lenders have for apartment building financing.  Each lender has guidelines specific to their bank, but every lender will require documentation relating to the financial status of the borrower and the apartment building itself. The general requirements are:

  • Executive Summary - This is a short document explaining how much you want to borrow, how long the loan will be outstanding, and how it will be repaid.  It also lists the apartment building amenities and why this is a good investment for you and the lender.
  • Personal Financial Statement - This document lists the borrower's assets and liabilities, which resolve to show the borrower's net worth.  The personal financial statement is a handy tool for lenders to determine what assets they can take from the borrower in the event of a loan default.
  • Credit Report - While most apartment building lenders are underwriting the loan on the strength of the property itself they will want to look at the borrower's credit report to make sure they do not have any current judgments or federal liens against them that may go in place ahead of the lender's new lien.  Lenders also want to make sure the borrower isn't currently in foreclose or bankruptcy, and doesn't have any late payments on previous loans.
  • Apartment Building Rent Roll and Expense Statement - The lender will always require a rent roll showing the current tenants and how much rent they pay.  They will also require a statement showing how much expenses are paid each year by the landlord.  These two items resolve to show the lender the net operating income (NOI) of the apartment building.  The NOI is basically the property's positive cash flow and tells the lender how much money will be available to make the loan payments you are planning to place on the property.  When reviewing the net operating income the lenders will apply a ratio called the debt service coverage ratio (DSCR).  The DSCR is a ratio of NOI to loan payments.  Generally speaking, the lender is looking for a DSCR of 1.20 or more. This means that the NOI is 1.2 times more than the debt you plan to place on the property.  For instance, if the loan payment is $1,000 USD per month, the NOI of the property must be at least $1,200 USD per month.  The DSCR ratio creates a buffer between NOI and loan payments which allows the borrower to continue making payments even if the NOI fluctuates a bit from month to month.
  • Appraisal - Every lender will require a commercial appraisal be completed before a loan is made. The appraisal must confirm the purchase price on the purchase and sale agreement, or minimum property value in the case of a refinance.
  • Maps and Pictures - While most appraisals will include pictures of the property, you may be dealing with an out of state lender who does not know the property area well.  In these cases, lenders often require additional color photos and detailed maps showing the property location in reference to public transportation and other municipal features, like police stations and fire houses.

Remember, each lender has particular requirements that may be unique to their bank or their state.  Before applying for any apartment building loan make sure to ask your lender for their document checklist, which will explain in detail all the items they require.  Most, if not all of the items listed above will make up the majority of the apartment lender's requirements.