To finance a 6-unit property with a commercial loan, you’ll borrow against the building’s income rather than your paycheck. Any property with five or more residential units sits on the commercial side of the lending world, so a 6-unit building does not qualify for a conventional 30-year residential mortgage. Instead, a commercial lender underwrites the property as a small business and asks whether the rent covers the debt with room to spare. Expect a 20% to 35% down payment, a debt service coverage ratio of at least 1.20x to 1.25x, several months of cash reserves after closing, and a document package considerably thicker than anything you assembled for a house.
Why a 6-Unit Building Falls Outside Residential Lending
Residential mortgage rules apply to one- to four-unit properties. At five units the classification switches to commercial multifamily, whether or not you plan to occupy a unit. The underwriting philosophy changes with it. A residential lender looks at your W-2 income, credit score, and personal debt-to-income ratio. A commercial lender looks at the property’s rental income, operating expenses, and physical condition first, and at you second.
You also lose borrower protections you may be used to. There is no standardized Loan Estimate or Closing Disclosure, no three-day right of rescission, and no required cooling-off period. Terms are shorter, down payments larger, and almost everything is negotiated directly between you and the lender. Understanding the metrics and the paperwork before you walk into the first meeting is what keeps the deal from stalling.
The Three Numbers Lenders Underwrite To
Commercial lenders decide a 6-unit deal on three figures: debt service coverage ratio, loan-to-value ratio, and your post-closing liquidity. Know where you stand on each before you request a term sheet.
Debt Service Coverage Ratio
DSCR measures whether the property earns enough to pay its mortgage. You divide the property’s annual net operating income (rent collected minus operating expenses like taxes, insurance, maintenance, and management) by the annual loan payments. A 1.25 result means the property earns 25% more than it owes the lender. Fannie Mae requires a minimum DSCR of 1.25x on its conventional multifamily loans, and Freddie Mac allows minimums as low as 1.20x in some markets.1Fannie Mae. Conventional Properties Term Sheet Most commercial bank lenders land in the same range. A higher DSCR gives you more leverage on rate and terms.
Loan-to-Value Ratio
LTV caps how much the lender will advance against the appraised value. Fannie Mae’s small mortgage loan program allows up to 80% LTV, so a 20% down payment.2Fannie Mae Multifamily. Small Mortgage Loan Program Term Sheet In practice, commercial banks often cap LTV at 65% to 75% for borrowers without a multifamily track record, which pushes real cash down to 25% or more. On a refinance, LTV runs against the current appraised value, not your original purchase price.
Liquidity Reserves
Lenders want proof you can carry the building through vacancies and surprise repairs. For investment properties, Fannie Mae requires at least six months of principal, interest, taxes, insurance, and association dues in liquid assets after closing. If you already own several financed properties, the requirement grows: a borrower with five to six financed properties must hold an additional 4% of the combined unpaid balances on those other mortgages.3Fannie Mae. Minimum Reserve Requirements Reserves are where otherwise viable deals quietly collapse because the buyer budgeted for the down payment and closing costs but forgot the cash that has to sit idle.
What Goes Into the Loan Package
Plan on several weeks to assemble the file. The lender wants to see the property, your finances, and your experience in that order.
Property Documents
The rent roll is the central document. It lists every unit, occupancy status, tenant name, monthly rent, lease start and expiration dates, and any additional charges like parking or pet fees.4Fannie Mae. Small Mortgage Loan Program Term Sheet The underwriter uses it to verify current income and gauge lease rollover risk. Leases that all expire within six months read as unreliable income.
You’ll also need a trailing twelve-month profit and loss statement, called a T-12, showing every dollar in and out over the past year. If the seller keeps sloppy books, rebuilding the T-12 from bank statements and invoices is worth the hours. The lender is going to scrutinize those numbers either way.
Borrower Documents
A Personal Financial Statement gives the lender your net worth. SBA Form 413 is a common template, though many lenders have their own version.5U.S. Small Business Administration. SBA Form 413 – Personal Financial Statement You list personal assets (cash, stocks, retirement accounts, real estate equity) and liabilities (credit card balances, auto loans, mortgages), and the lender verifies it against bank statements and credit reports.
If you own other investment properties, add a Schedule of Real Estate Owned listing each one with market value, outstanding mortgage balance, monthly rent, and monthly carrying costs. The lender uses it to figure your global cash flow and decide whether your portfolio helps or hurts the file.
A short resume of real estate experience matters more than many first-time buyers expect. Lenders want to see that you’ve managed similar properties or hired a qualified management company. No track record isn’t a disqualifier, but the lender may require a third-party management agreement or offer less favorable terms to compensate.
Which Loan Product Fits a 6-Unit Deal
Several products serve this size range, and the right one depends on the property’s condition, how long you plan to hold it, and the loan amount.
Fannie Mae and Freddie Mac Small Loans
Fannie Mae’s Small Mortgage Loan program finances stabilized multifamily properties of five or more units, with loan amounts up to $9 million.4Fannie Mae. Small Mortgage Loan Program Term Sheet Freddie Mac’s Optigo Small Balance Loan covers 5- to 50-unit properties at loan amounts between $1 million and $7.5 million.6Freddie Mac. Optigo Small Balance Loan Term Sheets Both offer competitive fixed rates and non-recourse execution with standard carve-outs for borrower misconduct. The catch: the property has to be stabilized, with strong occupancy history and sound physical condition.
HUD/FHA 223(f)
The FHA 223(f) program, authorized under 12 U.S.C. ยง 1715n, offers fixed-rate, fully amortizing loans with terms up to 35 years for acquiring or refinancing multifamily properties with five or more units.7Office of the Law Revision Counsel. 12 USC 1715n – Miscellaneous Mortgage Insurance These loans are non-recourse and carry some of the lowest multifamily rates available. As of late 2025, HUD reduced the upfront mortgage insurance premium to 0.25% and the annual premium to 0.25% for standard 223(f) acquisitions and refinances.8Federal Register. Changes in Mortgage Insurance Premiums Applicable to FHA Multifamily Insurance Programs HUD loans take significantly longer to close than agency or bank loans, and the property must show at least 85% average occupancy over the prior six months.
Commercial Bank Loans
Local and regional banks are often the most accessible route for a first-time multifamily borrower. These loans typically run five- to ten-year terms with 25-year amortization, meaning a balloon payment at maturity and a refinance to plan for. Rates are usually higher than agency or HUD, but approval moves faster, documentation is more flexible, and a direct relationship with a local banker counts. Bank loans are almost always full recourse, so you’re personally on the hook if the property can’t cover the debt.
Bridge Loans
If the property is underperforming, has heavy vacancy, or needs major renovation, it won’t qualify for agency or HUD financing. Bridge loans fill the gap at 12 to 36 months with rates often between 8% and 12%. You acquire, stabilize the building by filling units and completing repairs, then refinance into cheaper permanent debt once the DSCR qualifies. Bridge lenders focus on after-renovation value and your ability to execute the plan, and most require interest-only payments during the term.
Recourse and Prepayment: Two Features Worth Reading Carefully
Non-Recourse and Bad Boy Carve-Outs
Agency loans from Fannie Mae and Freddie Mac, along with HUD loans, are non-recourse: on default the lender can take the property but generally cannot pursue your personal assets. That protection disappears if you trigger what the industry calls bad boy carve-outs. Filing bankruptcy on the borrowing entity, committing fraud, misapplying property funds, or making unauthorized transfers of the property can convert the entire loan to full recourse. The carve-outs are non-negotiable on agency loans, and the list of triggering actions deserves a careful read with an attorney before you sign.
Prepayment Penalties
Unlike a residential mortgage, a commercial loan punishes early payoff. Three structures are common. Yield maintenance makes you pay the lender the difference between your loan’s interest rate and the current market rate across the remaining term, essentially guaranteeing the lender’s expected return. Defeasance, common in securitized loans, requires you to substitute the property with government securities producing equivalent cash flow. Step-down penalties are the simplest: a declining percentage of the outstanding balance, such as 5% in year one, 4% in year two, down to 1% in year five. HUD 223(f) loans commonly use a step-down structure with a one-year lockout. If you expect to sell or refinance before loan maturity, the prepayment structure should drive your product choice as much as the interest rate.
Underwriting, Third-Party Reports, and Closing
Once you submit a package and accept a term sheet, underwriting takes over. The phase runs about 30 days for a bank loan and several months for a HUD loan, and you pay for several third-party reports upfront.
Appraisal, Environmental, and Property Condition
The lender orders a commercial appraisal that values the building through an income capitalization approach rather than comparable sales alone. Appraisal costs for a 6-unit property typically run $3,000 to $5,000. A Phase I Environmental Site Assessment, performed under the ASTM E1527-21 standard, reviews the property’s history to flag potential contamination from prior uses like dry cleaners, gas stations, or industrial operations. If the Phase I raises concerns, the lender may require a Phase II with soil or groundwater testing. Many lenders also require a Property Condition Assessment, where an engineer walks the property and documents the condition of the roof, plumbing, electrical, and HVAC systems. The PCA often drives the lender’s decision on replacement reserves.
Replacement Reserves
Commercial lenders frequently require monthly deposits into a replacement reserve account for major capital repairs. HUD sets the initial monthly deposit at 0.6% of total building replacement cost, and lenders can go higher based on the building’s condition.9HUD. Chapter 5 – Reserve for Replacements You don’t control this money freely; withdrawals need lender approval and must go toward qualifying capital expenditures like a roof or boiler replacement, not routine maintenance.
Commitment Letter and Closing Costs
Once underwriting signs off, the lender issues a commitment letter that locks in the rate, loan amount, term, amortization, and special conditions. Read it as if it were the closing documents, because it dictates them. At closing you sign a promissory note and a deed of trust or mortgage pledging the property as collateral. Legal fees, title insurance, and recording costs typically run 1% to 3% of the loan amount, with lender or broker origination fees adding another 0.5% to 2% on top. Budget the full range before you commit to a purchase price.
Ongoing Covenants and Reporting
Closing is not the end of the lender’s involvement. Most commercial real estate loans require periodic submission of property financial statements, updated rent rolls, and borrower tax returns. For a stabilized 6-unit building with long-term leases, annual reporting is usually enough. During lease-up or heavy turnover, the lender may require quarterly or even monthly updates.10Office of the Comptroller of the Currency. Comptrollers Handbook – Commercial Real Estate Lending
Some loans include a minimum DSCR covenant that must hold throughout the term. If your DSCR drops below the threshold because of rising vacancies or unexpected expenses, the lender has the contractual right to accelerate the debt and demand full repayment. Lenders usually work with borrowers to cure a violation first, but the leverage shifts entirely to the lender’s side the moment the covenant breaks. Tracking the property’s monthly numbers isn’t optional when a covenant failure can put the whole investment at risk.
Tax Treatment That Shapes the Return
A 6-unit building qualifies as residential rental real estate for federal tax purposes, which opens the door to the main deductions real estate investors rely on.
The IRS allows depreciation of the building, excluding land, over 27.5 years using straight-line under the Modified Accelerated Cost Recovery System. On a building valued at $825,000 excluding land, that produces $30,000 a year in non-cash deductions against rental income. Improvements and additions depreciate over the same 27.5-year schedule.11Internal Revenue Service. Publication 527, Residential Rental Property Personal property inside the units, like appliances and carpeting, depreciates over five to seven years and may qualify for bonus depreciation in the year placed in service. One boundary worth knowing: Section 179 expensing for building improvements such as roofs and HVAC applies only to nonresidential commercial property, not residential rental buildings, so a 6-unit apartment building does not qualify for that write-off.12Internal Revenue Service. Depreciation Expense Helps Business Owners Keep More Money
When you sell, you can defer capital gains by rolling proceeds into another qualifying investment property through a 1031 exchange. The deadlines are hard: identify replacement properties within 45 days of the sale and close on one within 180 days.13Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Miss either and the full gain is taxable in the year of sale.
Compliance That Can Trigger a Default
Lenders expect you to run the building in compliance with federal housing and environmental law. Violations create legal liability, and if your loan documents include compliance covenants, they can also trigger default.
If the building was constructed before 1978, federal law requires you to disclose any known lead-based paint hazards to every tenant before they sign a lease. You must provide an EPA-approved lead hazard pamphlet, share any existing inspection reports, and include a specific Lead Warning Statement in every lease.14eCFR. Subpart A – Disclosure of Known Lead-Based Paint and/or Lead-Based Paint Hazards Upon Sale or Lease of Residential Property A violation carries a civil penalty of up to $22,263.15eCFR. 24 CFR 30.65 – Failure to Disclose Lead-Based Paint Hazards Across six units with normal turnover, exposure adds up quickly.
Fair Housing Act requirements also apply to occupancy standards, advertising, and tenant selection. HUD’s longstanding policy treats a general occupancy limit of two persons per bedroom as reasonable, though state and local codes may set different standards based on square footage or building capacity.16U.S. Department of Housing and Urban Development. Public Housing Occupancy Guidebook Occupancy limits that disproportionately exclude families with children can draw a discrimination complaint, and a complaint that disrupts operations can push the property under its DSCR covenant.