Residential and commercial multifamily financing use different approaches to evaluate rental properties. Residential financing generally applies to smaller properties, while commercial multifamily financing is generally used for larger apartment buildings. The classification affects the type of loan, underwriting process, income analysis, and property requirements.
For smaller rental properties, lenders can use a DSCR-based model. DSCR measures the relationship between a property’s rental income and its debt obligations. The focus is therefore placed on whether the property generates enough income to support its financing rather than relying entirely on the borrower’s personal income.
Commercial multifamily financing takes a broader view of the property. Lenders analyze the building’s overall operating performance, including Net Operating Income and property value. Investors comparing multifamily mortgage lenders should therefore understand which type of underwriting applies to their property before comparing loan options. The same rental strategy can be evaluated differently depending on the property’s classification.