Every lender will have different criteria. If you are talking 4 or less units the criteria is different than 5 and up. Generally for 4 or less they will take the income and discount it 25%. You will have to qualify for any deficiency. If you are talking 5 or more units the loan is much more complicated. Most lenders will now use a vacancy factor and apply a management cost in calculating net operating income. They will then calculate a debt coverage ratio (DCR) and most are going to require a minimum of 1.25. What that means is that for every dollar of debt that is being paid out on the loan you will need $1.25 in income. A 1.00 DCR is therefore a break even property and a negative number is a property that does not break even. They might want you to personally guarantee the loan which is generally referred to as a recourse loan. You probably need a good loan broker that can shop what is avaliable in the market at any given time. A good broker will be able to guide you and provide the lender what will be needed for them to do the loan. The broker will also be able to iron out problems that may surface during the process of getting the loan. I have only touched on a few of many variables so talk to a commercial loan broker that specializes in multi-family.
Paul Sylvester, CCIM
Apr 29, 2009