A 5-unit building sits on the commercial side of the financing line, so you cannot buy one with a standard residential mortgage. To finance a 5 unit property, you will use a commercial multifamily loan through Fannie Mae, Freddie Mac, FHA/HUD, or a bank’s own portfolio, and the lender will qualify the deal mostly on the building’s rental income rather than your paycheck. Expect 20% to 30% down on conventional products, a debt service coverage ratio of at least 1.25, heavier documentation than a residential loan, and a closing timeline measured in weeks rather than days.
Why Five Units Changes the Loan
Federal regulations draw the residential-to-commercial line at five units. Under 12 CFR ยง 1282.1, multifamily housing is defined as a residence with more than four dwelling units.1eCFR. 12 CFR 1282.1 – Definitions That one line changes how the property is appraised and how the loan is underwritten.
With a duplex through a fourplex, the lender mostly looks at your personal debt-to-income ratio and credit score. At five units, the building’s net operating income takes over. The appraiser also shifts methods, valuing the property by dividing net operating income by a market capitalization rate instead of comparing it to nearby home sales. A well-leased building with clean books will appraise stronger under this approach than the same building sitting half-empty.
Loan Options That Fit a 5-Unit Building
Several loan products are built for small multifamily. The right one depends on how long you plan to hold, how much cash you have, and whether the building is stabilized or needs work.
Fannie Mae Small Mortgage Loans
Fannie Mae’s Small Mortgage Loan program is one of the most common choices for 5-unit properties. Loans go up to $9 million, with terms of 5 to 30 years and amortization up to 30 years. Fixed and variable rates are both available, and the minimum DSCR is 1.25x.2Fannie Mae. Small Mortgage Loan Program Term Sheet These loans get sold on the secondary market, which keeps rates competitive but means the underwriting is standardized and strict.
Freddie Mac Optigo Small Balance Loans
Freddie Mac’s Optigo Small Balance Loan program targets buildings with 5 to 50 units, with loan amounts from $1 million to $7.5 million.3Freddie Mac Multifamily. Optigo Small Balance Loan Term Sheets You can pick a fixed-rate term of 5, 7, or 10 years, or a hybrid structure with an initial fixed period and then a floating rate. Amortization runs up to 30 years, the loans are non-recourse with standard carve-outs, and partial or full-term interest-only options are available.4Freddie Mac Multifamily. Optigo Small Balance Loan Term Sheet
FHA/HUD 223(f) Loans
The FHA 223(f) program is worth a close look for a stabilized 5-unit building you plan to hold long-term. Fixed rates run up to 35 years with full amortization, so there is no balloon at the end. The loans are non-recourse and allow leverage up to 87% of value for market-rate properties, 90% for affordable housing. The trade-offs are real: mortgage insurance premiums (1% of the loan amount at closing, then 0.60% annually), a requirement that the property has held at least 85% occupancy over the prior six months, replacement reserves of at least $250 per unit per year, and a closing timeline that runs longer than agency loans. For a small building, the paperwork can feel heavy, but the terms are hard to beat for a long hold.
Bank Portfolio Loans
Local banks and credit unions sometimes keep commercial loans on their own books. Because the bank sets its own standards, a portfolio loan can approve a property that doesn’t fit the agency mold, whether the issue is low occupancy, needed renovation, or an unusual borrowing structure. Terms are typically shorter (often 5 to 7 years with a balloon), rates run higher than agency products, and the loan is more often full recourse. A relationship with a local commercial lender pays off if you plan to buy more properties in the same market.
Bridge and Hard Money Loans
If the building needs major renovation or is too vacant to qualify for conventional financing, a bridge or hard money loan can carry you through stabilization. Bridge loans typically run 6 to 36 months at higher-than-conventional rates and LTVs of 65% to 80%. Hard money is shorter (6 months to 2 years) at 10% to 18% or more, plus origination fees. The plan is always to refinance into a permanent loan once rents support it, and the math only works if the renovation raises income enough to cover the short-term cost.
A Note on SBA 504
The SBA 504 program requires the borrower to occupy at least 51% of an existing building, so it does not work for a pure rental 5-unit apartment building. It can fit when the property includes ground-floor commercial space your own business will occupy, but most 5-unit rental investors won’t qualify.5U.S. Small Business Administration. 504 Loans
What the Lender Will Check
Commercial multifamily underwriting evaluates the property first and the borrower second. A handful of numbers do most of the work.
Debt Service Coverage Ratio
DSCR is the single most important figure. Divide the property’s annual net operating income by the annual mortgage payment. A 1.25 DSCR means the building throws off 25% more than the debt costs. Most lenders require at least 1.25x, and a lower ratio either kills the deal or shrinks the loan amount.2Fannie Mae. Small Mortgage Loan Program Term Sheet If you are close, cutting expenses or documenting that below-market rents can be raised sometimes gets you across the line.
Credit Score
Your personal credit still matters. Freddie Mac’s small balance program sets a floor around 650. Most conventional commercial banks want 670 to 700 or higher. A lower score doesn’t automatically disqualify you, but it limits your options and pushes the rate up.
Loan-to-Value and Down Payment
Commercial multifamily LTVs typically run 70% to 80% on conventional products, meaning 20% to 30% down. FHA 223(f) allows up to 87% LTV, so as little as 13% down. Watch that the loan may be capped by DSCR rather than LTV: even if the appraised value would support a bigger loan, the coverage requirement can hold it back.
Reserves
Plan for cash beyond the down payment. Agency loans commonly require replacement reserves around $250 per unit per year held in a lender-controlled escrow. Some programs also require operating reserves of 2% to 4% of the loan amount. On a 5-unit building with a $1 million loan, that can add $20,000 to $40,000 to what you bring to closing.
Insurance
Commercial property insurance must be in place before closing, generally with coverage equal to the lesser of 80% of replacement cost or the outstanding loan balance. Liability minimums typically run $1 million per occurrence and $2 million aggregate. Properties in flood zones need coverage through the National Flood Insurance Program. Premiums run higher than residential policies, so price them early.
Documents to Have Ready
Commercial applications are documentation-heavy. Assembling the package before you approach a lender shortens the timeline and signals a serious borrower.
Property Financials
The core document is a trailing 12-month profit and loss statement showing actual income and expenses. The lender uses it to compute DSCR and confirm the building performs as described. You also need a certified rent roll listing every tenant, monthly rent, security deposit, and lease expiration. Together they show what the building earns today and how stable that income is.
Personal Financials
Prepare a personal financial statement listing all assets and liabilities, plus a schedule of real estate owned that captures your other properties and existing debt. Lenders use these to evaluate your global cash flow. You will also need two to three years of federal tax returns for yourself and any entity that will hold the property.6Fannie Mae. B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns Any inconsistency between the application and the supporting documents causes delays or a denial, so reconcile the numbers before you submit.
Prepayment Penalties
This is the feature that catches residential investors off guard. Most commercial multifamily loans carry prepayment penalties big enough to change your exit strategy.
A step-down (declining) schedule charges a percentage of the balance that decreases each year: perhaps 5% in year one, 4% in year two, and so on to zero. This is the simpler structure and the one most borrowers prefer. Both Fannie Mae and Freddie Mac small balance loans offer declining prepayment options.4Freddie Mac Multifamily. Optigo Small Balance Loan Term Sheet
Yield maintenance is more complex and often more expensive. The lender computes the present value of the remaining interest payments you would owe, discounted at the current Treasury rate. When market rates are lower than your loan rate, the penalty can run into tens of thousands of dollars on even a small loan. Before signing any term sheet, model the prepayment cost at the point you actually expect to sell or refinance. A slightly higher rate with a declining schedule can cost less overall than a lower rate with yield maintenance.
Recourse vs. Non-Recourse
Agency loans (Fannie Mae, Freddie Mac, HUD) are usually non-recourse: the lender’s remedy for default is limited to the property. Bank portfolio loans are more often full recourse, putting your personal assets on the hook if the building’s value drops below the loan balance.
Non-recourse loans still carry “bad boy” carve-outs that trigger full personal liability for fraud, misapplication of funds, unauthorized transfers, or a bankruptcy filing of the borrowing entity. These carve-outs are standard and non-negotiable on agency loans. Operate the property honestly and the protection holds.
Closing Timeline and Costs
Once you accept a term sheet, formal underwriting and closing typically take 6 to 10 weeks for conventional commercial products. HUD loans run considerably longer.
The lender orders several third-party reports at your expense. A commercial appraisal using the income approach generally runs $2,000 to $10,000 depending on complexity and market. The lender also requires a Phase I Environmental Site Assessment, which reviews historical records and includes a site visit to check for contamination from prior uses.7ASTM. E1527 Standard Practice for Environmental Site Assessments A Phase I typically costs $2,000 to $4,500 for a standard multifamily property. Budget $5,000 to $15,000 in total third-party costs before you reach the table.
At closing you sign a promissory note and a deed of trust or mortgage (depending on state) that pledges the property as collateral.8Consumer Financial Protection Bureau. Review Documents Before Closing Add title insurance, recording fees, and potentially state or local transfer taxes. Transfer tax rates vary widely: some states charge nothing, others charge up to 3% of the purchase price, and some localities layer on their own. Recording fees run from a few hundred to a few thousand dollars. After signatures, notarizations, and recording, the lender releases funds to the seller.
What the Lender Expects After Closing
The loan comes with ongoing obligations that residential borrowers never see. Ignoring them can trigger a default even while you make every payment on time.
Most lenders require annual operating statements and updated rent rolls so they can confirm the property is still performing.9Office of the Comptroller of the Currency. Commercial Real Estate Lending – Comptrollers Handbook If your DSCR falls meaningfully below the level in your loan documents, the lender can raise your required reserve deposits or restrict distributions.
Physical inspections are also standard. For Fannie Mae loans of $6 million or less, which covers most 5-unit properties, inspections happen every two years on loans over $750,000 in good standing, and every five years on smaller loans with good ratings.10Fannie Mae Multifamily Guide. Property Inspection Protocol If the risk rating deteriorates or the property scores poorly, inspections move to annual. The inspector reviews physical condition, not just rent collection, and deferred maintenance can trigger lender-required repairs.