Apartment Building Loans (5+ Units): Agency, Bank, HUD and Bridge
An apartment building loan for five or more units is a commercial multifamily mortgage. The lender sizes it mainly on the building’s net operating income and debt service coverage, with your personal income playing a smaller role. The main choices are Fannie Mae and Freddie Mac small-balance loans made through approved lenders, bank and credit union loans held in portfolio, HUD-insured Section 223(f) loans, and short-term bridge loans. The right one depends on the building’s condition, how long you plan to hold it and how much freedom you want to sell or refinance early.
Buyers moving up from a duplex or fourplex are often surprised by how different the process feels. Two-to-four unit loans follow residential guidelines, as our guide to financing 2-4 unit properties explains. At five units the loan becomes a commercial product, with its own underwriting, prepayment terms and third-party reports. This page covers the loan types and the terms that matter to a buyer. It does not quote rates, which change daily and vary by lender.
This is general information, not lending or tax advice. Ask a commercial mortgage lender or broker to quote terms for your building, and have your CPA review how the loan fits your tax picture.
Why five units changes the loan
A commercial multifamily lender starts with the property. It looks at the rent roll, the trailing 12 months of income and expenses, and its own estimate of net operating income after vacancy, management and reserves. It then sizes the loan by three tests and lends the lowest result:
- Debt service coverage ratio (DSCR). NOI divided by annual principal and interest. Fannie Mae’s published term sheet for its small loans lists a minimum of 1.25x. Our page on DSCR loans in California explains the ratio in detail.
- Loan-to-value (LTV). The loan as a percentage of the lower of price or appraised value. Both agencies publish a maximum of 80% for their small-balance products.
- Debt yield. Some lenders also check NOI as a percentage of the loan amount, a test that ignores the interest rate.
Because NOI drives the result, the price you agree to and the loan you can get are separate questions. A seller’s cap rate built on today’s taxes and below-market expenses can produce a loan well short of what you expected.
A hypothetical sizing example
| Step | Figure |
|---|---|
| Purchase price | $4,500,000 |
| Lender’s underwritten NOI | $300,000 |
| Maximum annual debt service at 1.25x DSCR ($300,000 / 1.25) | $240,000 |
| Assumed loan constant (rate plus amortization; illustration only) | 7.5% |
| Loan supported by DSCR ($240,000 / 0.075) | $3,200,000 |
| Loan supported by 80% LTV | $3,600,000 |
| Loan offered (lower of the two) | $3,200,000, about 71% of price |
In this example the buyer brings $1.3 million plus closing costs, not the 20% a quick LTV estimate suggests. Every number here is assumed; your lender’s underwriting sets the real ones.
Fannie Mae and Freddie Mac small-balance loans
Both agencies buy multifamily loans made by approved lenders, so you apply through the lender, not the agency. Fannie Mae runs its program through its Delegated Underwriting and Servicing (DUS) model. Freddie Mac’s small balance loans are quoted and originated through its approved Optigo lenders. Here is how each agency describes its product, as of October 2026:
| Feature | Fannie Mae Small Loans | Freddie Mac Optigo Small Balance Loans |
|---|---|---|
| Loan size | Up to $9 million nationwide | Not stated on Freddie’s product page; ask the lender |
| Property | Existing, stabilized properties with 5 or more units; purchase or refinance | Multifamily; confirm eligibility with the lender |
| Terms | 5 to 30 years, fixed or variable | Fixed 5, 7 or 10 years; hybrid ARM up to 20 years after a 5, 7 or 10-year fixed period |
| Amortization | Up to 30 years | 30 years |
| Maximum LTV | 80% | Up to 80% |
| Minimum DSCR | 1.25x | Not stated on the product page |
| Recourse | Non-recourse, with carve-outs for bad acts such as fraud and bankruptcy | Non-recourse |
| Prepayment | Yield maintenance or declining prepayment premium | Declining prepayment structure |
| Other | 30 to 180-day rate commitments; supplemental loans | Interest-only and cash-out options |
The Fannie Mae figures come from its published term sheet, which carries a 2024 copyright, so confirm current terms with a lender. Neither agency product is built for a vacant or half-renovated building. Fannie Mae’s term sheet says “stabilized,” and lenders apply that word strictly.
Bank and credit union portfolio loans
A local or regional bank that keeps the loan on its own books sets its own terms. These loans often carry shorter fixed periods, a personal guarantee from the borrower, and a prepayment penalty that steps down each year. In exchange, a bank can be more flexible on things agency lenders resist: mixed-use buildings, older properties with deferred maintenance, smaller loan amounts, or a borrower who wants to close quickly.
Banks also tend to value the relationship. Some will ask you to move deposits or operating accounts there. Ask early whether the loan is full recourse or limited, how the rate resets after the fixed period, and whether the bank will let a future buyer assume it.
HUD Section 223(f)
Section 223(f) of the National Housing Act lets HUD insure mortgages for the purchase or refinance of existing multifamily projects. The federal program inventory describes it as insurance to HUD-approved lenders on long-term loans that can be financed with Ginnie Mae mortgage-backed securities, processed under HUD’s Multifamily Accelerated Processing (MAP) guide.
The trade-off is time and paperwork. HUD loans go through more extensive third-party reports and HUD review than an agency or bank loan, so they suit owners refinancing a building they plan to hold for a long time more than a buyer racing a 30-day close. A HUD-approved lender can tell you the current term, leverage and coverage limits.
Bridge loans for value-add buildings
When a building is too vacant, too dated or too far below market rent to qualify as stabilized, buyers often use a bridge loan: short-term financing, usually interest-only, from a debt fund or private lender. The plan is to renovate, raise occupancy and then refinance into permanent debt.
The risk sits at the exit. If rents, values or interest rates move the wrong way, the permanent loan may not cover the payoff. Before you sign, ask how extensions work and what they cost, and run the refinance at a higher rate and a lower NOI than you expect. In rent-stabilized buildings, such as the pre-1979 apartments covered by San José’s Apartment Rent Ordinance, the pace of rent growth is limited by law, which should shape any bridge plan.
Prepayment, recourse and rate lock timing
Commercial loans price the lender’s right to keep collecting interest, and the prepayment clause can matter more than a few basis points of rate:
- Yield maintenance makes the borrower compensate the lender for interest it loses when you pay early. It usually costs more when market rates have fallen since closing.
- Declining or step-down premiums charge a set percentage of the balance that falls over time. They make the cost easier to predict if you might sell or exchange the building.
- Non-recourse loans limit the lender to the property except for listed carve-outs, such as fraud or a bankruptcy filing. Read the carve-out list; it defines when you become personally liable.
Rate locks don’t always line up with escrow. Fannie Mae offers commitments of 30 to 180 days, but a lock usually comes only after the lender has the appraisal and reports. Build your loan contingency and closing date around the lender’s actual timeline, and keep your 1031 exchange deadlines in view if this is a replacement property.
What lenders look at in Bay Area and North Bay buildings
- Rent roll and leases. Lenders want signed tenant estoppel certificates on many deals, plus copies of leases and any side agreements.
- Rent rules. Local rent control or state caps limit how fast income can grow, and underwriters size the loan on in-place rents.
- Seismic condition. Soft-story and older concrete buildings may need retrofit work or a lender’s seismic review; see our guide to seismic retrofits for multifamily buildings.
- Balconies, decks and stairs. In buildings with three or more units, these fall under a state inspection law (Health and Safety Code 17973); our SB 721 balcony inspection guide covers the deadlines.
- Insurance. Premiums, deductibles and availability in wildfire areas flow straight into NOI and into the coverage the loan requires.
- Property tax after the sale. The lender will underwrite taxes at your purchase price, not the seller’s bill. Our page on California property tax for investors explains the reassessment.
- Environmental and physical reports. Fannie Mae’s small loan program uses a streamlined inspection and an environmental screening under the ASTM E-1528-14 standard; bank and HUD requirements differ.
Questions people ask
Is a loan on a five-unit building a residential or commercial loan?
Commercial. Residential agency guidelines stop at four units, so a five-unit building is financed with a multifamily or commercial loan sized mainly on the property’s income, DSCR and value.
How much down payment do I need for an apartment building?
It depends on the lowest of the lender’s DSCR, LTV and debt yield tests. Agency small-balance loans publish a maximum of 80% LTV, but many purchases are limited by coverage instead, which can mean 30% or more down when rents are low relative to price.
What is the Fannie Mae small loan limit?
Fannie Mae’s small loans page lists fixed and variable-rate loans up to $9 million nationwide, made through its DUS lender network. Confirm current terms with a participating lender.
Are apartment building loans non-recourse?
Agency small-balance loans are described as non-recourse, with personal liability carve-outs for bad acts. Bank portfolio loans more often require a personal guarantee. Read the guarantee and carve-out documents before you commit.
Can I use a bridge loan and then refinance into a Fannie Mae or Freddie Mac loan?
That is the usual plan for value-add buildings, but the refinance depends on the building qualifying as stabilized and on rates and NOI at the time. Underwrite the exit conservatively.
Why do apartment loans have prepayment penalties?
Commercial lenders and the investors who buy their loans count on a stream of interest. Yield maintenance or a step-down premium compensates them if you pay off early, so choose the structure that fits how long you expect to hold the building.
Getting financing lined up before you write an offer
Talk to at least one agency lender and one local bank before you tour seriously, and send each the same rent roll and operating statement so the quotes compare. Diamond may refer you to partners we work with; you’re free to choose any provider. Our multifamily investment pages and the guide to buying an apartment building cover underwriting and escrow. When you have a building in mind, contact our investor services team, or see our general financing resources.
Sources & notes
- Fannie Mae Multifamily: Small Loans
- Fannie Mae Multifamily: Small Mortgage Loan term sheet (copyright 2024)
- Freddie Mac Multifamily: Small balance loans
- Federal Program Inventory (OMB): 14.155 Mortgage Insurance for the Purchase or Refinancing of Existing Multifamily Housing Projects, Section 223(f)
- Cornell LII: 12 U.S.C. 1715n (including subsection (f))
Last reviewed October 2026 by Matthew Martinez.
