Fannie Mae Small Apartment Loans

Fannie Mae multifamily is one of the largest providers of multifamily financing in the United States, financing more than $70 billion of multifamily properties per year. While Fannie Mae used to focus solely on financing apartment loans of $10 million or more, the GSE discovered there was a high demand for smaller properties. This is particularly due to the case that working-class families generally live in smaller apartment buildings under 100 units. 

Fannie Mae’s Small Multifamily Loan program was designed specifically for apartment investors looking to borrow between $750,000 and $6 million to purchase stabilized multifamily properties. Fannie Mae loans are available nationwide, so borrowers from Florida to Alaska can benefit from this generous and quickly expanding apartment loan program. 

Fannie Mae has designed this loan program with maximum flexibility for smaller investors, as they provide several fixed and floating-rate loan options with 5, 7, and 10-year terms, with strong borrowers able to secure loans of up to 30-years. Interest-only options are also available in some situations. 

Fannie Mae DUS vs. Fannie Mae Small Loans

Fannie Mae’s Small Loan Program stands apart from its traditional Delegated Underwriting and Servicing (DUS) program loans. DUS loans are known for their strict and time-consuming underwriting and generally begin at $3 million, going up to a vast $100 million. 

In contrast, Fannie Mae specifically designed the Small Loan Program with a streamlined application and approval process for properties of a smaller size. Fannie Mae understood that long closing times and tons of expensive paperwork were major barriers to smaller apartment investors. In addition, lenders are permitted greater flexibility in how they underwrite these loans. For example, lenders can waive a property’s replacement reserve requirements, something that would be unheard of for Fannie’s larger loan programs. 

In addition to a streamlined approval process and more lender flexibility, Fannie Mae Small Loans have substantial other benefits for borrowers. These include the fact that these loans are non-recourse, which means that a lender cannot go after the borrower’s personal assets if they default on their loan. These loans are also assumable by a new borrower, offer relatively high leverage, and offer a faster closing process than typical DUS loans.

Up to this point, the Fannie Mae Small Loan program has issued more than $24 billion in small-balance apartment financing since the program was initiated in 2009. Just like other Fannie Mae and Freddie Mac multifamily loans, Fannie Mae Small Loans are purchased by the appropriate GSE (in this case Fannie Mae) and packaged into bonds by Ginnie Mae. 

Pros and Cons of Fannie Mae Multifamily Small Loans

As with any loan program, Fannie Mae Small Loans have a variety of pros and cons. 

Pros:

• Loans are non-recourse with bad boy carve-outs 

• Up to 3% of purchasing price can be financed 

• LTVs up to 80%

• DSCR requirements as low as 1.25x

Cons:

• The sponsor needs a net worth of 100% of the loan amount (excluding primary residence), generally with 10% liquidity 

• Minimum required credit score of 660-680+ 

• Borrowers must generally pass background checks 

• Inexperienced investor-borrowers must use a reputable property management company (not self-manage)

Prospective Fannie Mae Small Multifamily Loan Terms for 2021

• Loan Amount: From $1 million to up to $6 million

• Leverage:  80% Max. LTV 

• Terms and Amortization: Fixed-rate terms of up to 30 years. ARM and hybrid ARM periods are also available. Amortizations up to 30 years. Interest-only (I/O) options are available. Interest calculated using Accrual 30/360 and Actual/360. 

• Interest-Only Options: I/O loans available for qualified borrowers 

• Occupancy Requirements: 90% physical / 85% economic for the 90-day period leading up to closing

• Prepayment: Yield maintenance or a declining (step-down) prepayment premium

• Rate Lock: 30-180 day locks available at application, streamlined rate locks also available

• Eligible Properties: 

  • 5+ unit apartment properties

  • Multifamily Affordable Housing (MAH) properties

  • Mixed-use properties with up 35% commercial rentable space and up to 20% of effective gross income

  • Tenant, military, and corporate tenants are allowed but must be no more than 20% of all tenants. 

  • Manufactured housing communities (MHCs) with 50+ pad sites.

  • Cooperative properties

  • Duplexes and townhomes 

  • Fractured condos 

• Net Worth/Sponsor Requirements: 

  • The loan sponsor or key principal must have a net worth of at least 100% of the loan amount (excluding primary residence). 

  • Must also have liquidity equalling 9 months of mortgage payments. 

  • Credit scores of 680+ required

  • Local owners do not need previous apartment ownership experience, while absentee owners need at least 24 months of multifamily ownership experience. 

• Supplemental Loans: Permitted after 1 year, no outside subordinate debt (such as mezzanine loans) permitted 

• Assumabliblity: Loans are fully assumable with lender approval and a 1% fee

• Legal Structure: Borrower must be structured as a single-asset entity 

• Escrows: Lenders are permitted to waive Replacement Reserves for some loans. Higher leverage transactions often require replacement reserves, tax, and insurance premiums to be placed in an escrow account.  

• Third-Party Reports: Streamlined (using ASTM E-1528-14 protocol), generally including an appraisal and streamlined environmental report, along with a few other reports. 

Fannie Mae Small Multifamily Loans: Factors to Consider

Borrower Net Worth, Credit, Liquidity Requirements, and More

While Fannie Mae Small Multifamily Loans are a great product, borrowers should take a few additional factors into consideration: 

• Net-worth and liquidity requirements are not flexible 

• There is generally a minimum expenditure requirement for specific line items expenses including payroll, management, maintenance, and replacement reserves

• Subject properties generally need to be in good neighborhoods and in excellent condition (no rehabs or value-add properties permitted) 

• Properties located in seismic zones 3 & 4 with subterranean parking structures require a PML (probably maximum loss) report

• Properties generally must have reinforced masonry construction

• Properties built before 1980 generally need to have seismic retrofits 

• Borrowers generally cannot have undergone bankruptcy or experienced past real estate-related legal issues

• Loans are only partially non-recourse, and borrowers must take on some liability 

• Non-contiguous property waivers are challenging top obtain 

• HOA or PUD properties are generally not eligible 

• Insurance expenses may be high 

Fannie Mae Small Multifamily Loans vs. Freddie Mac Small Balance Loans 

When looking at an agency loan for a small multifamily property, many borrowers may be weighing and balancing the pros and cons of Fannie Mae’s Small Multifamily Loan program and Freddie Mac’s popular Small Balance Loan (SBL) program. Freddie Mac’s SBL program is also quite popular, with a record $33 billion in loans issued since the program’s formation. 

The main differences between Fannie Mae Small and Freddie Mac SBL loans include:

• Freddie SBL loans are more expensive in smaller markets, yet are more likely to be approved in these markets than Fannie Mae Small Loans

• Freddie Mac SBL loans offer terms up to 20-years, while Fannie Mae offers loan terms of up to 30-years

• Freddie Mac SBL loans may allow more commercial space 

• Fannie Mae Small Loans allow for up to 3% of the closing costs to be financed, while Freddie Mac SBL loans typically do not

Terms for Freddie Mac SBL loans include: 

• Loan Purpose: Purchasing or recapitalizing high-quality multifamily properties 

• Loan Size: $1 million to $7.5 million (smaller loans sometimes allowed) 

• Loan Terms: 

  • 20-year floating-rate loan with a 5, 7, or 10-year initial fixed-rate period

  • OR a 5, 7, or 10-year fixed-rate loan (interest-only (I/O financing options also available at lower leverages and higher DSCRs) 

• Recourse: Most deals are on-recourse with standard “bad boy” carve-outs for fraud, mismanagement, and intentional bankruptcy

• Amortization: 30 years max. amortization  

• LTV: 

  • Top and Standard Markets: 80% LTV

  • Small/Very Small Markets: 75% LTV for purchases, up to 70% for refinances

• DSCR: 

  • Top Markets: 1.20x

  • Standard Markets: 1.25x

  • Small Markets: 1.30x

  • Very Small Markets: 1.40x

• Full-Term Interest Only (I/O) Loans: 

  • Top Markets: Min. DSCR 1.35x/max. LTV 65% 

  • Standard Markets: Min. DSCR 1.40x/max. LTV 65% 

  • Small Markets: Min. DSCR 1.40x/max. LTV 60%

  • Very Small Markets: Min. DSCR 1.50x/max. LTV 60% 

• Rate lock: 60-, 90-, 120-, 150-, 180-day+ lock options available for most borrowers 

• Sponsor Net Worth Requirement: 

  • 100% of the loan amount 

  • Liquid funds of at least 10% of the loan amount 

  • 9 months of expenses in escrow are generally required

• Closing Timeline: 45 to 60 days for most deals 

• Loan Assumption: With lender approval and a 1% assumption fee

• Commercial Space Limits: Allowed up to 40% of total gross potential rent (GPR), no more than 40% of the net rentable area permitted 

• Property/Asset Types: 

  • Allowed: 

    • Section 8 affordable properties

    • Mixed-use properties with a small amount of commercial space

  • Prohibited: 

    • Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restriction Agreements (LURAs): Except those in the last two years of the first compliance period or in the extended use period. 

    • Student Housing: Greater than 25% concentration prohibited 

    • Military Housing: Greater than 25% concentration prohibited

    • Seniors Housing: Fully prohibited

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