Freddie Mac Small Balance Loans

The Freddie Mac SBL loan program was designed specifically for apartment investors looking to borrow between $1 million and $7.5 million to purchase or refinance stabilized multifamily properties. Freddie Mac SBL financing is available nationwide, so borrowers from Florida to Alaska can benefit from this generous and quickly expanding apartment loan program. 

Due to its flexible nature, the Freddie Mac Small Balance Loan is currently one of the most popular types of small balance apartment loans on the market today. Via the Freddie Mac Optigo program, Freddie Mac has authorized 12 Optigo lenders nationwide to offer these loans, which can close faster and require significantly less red tape than traditional Freddie Mac multifamily financing. Since the Freddie Mac SBL program’s inception in 2009, Freddie Mac Multifamily has originated over $33 billion of Small Balance Loans, meaning that the product has made a significant contribution to the multifamily lending market.

In addition to faster closings and less paperwork, Freddie Mac guarantees that your lender will also be your servicer throughout the entire life of your loan. This typically means easier communication, since you already have an established relationship and more options when it comes to loan workouts and other special situations.

This stands in stark contrast to lending options like CMBS financing, in which loans are handled by a separate servicer and a special servicer in default situations, which can often end in disaster for borrowers. In addition, it should be noted that, like most Fannie and Freddie multifamily options, Freddie Mac SBL loans are fully assumable with a 1% fee for qualified borrowers.

The Freddie Mac SBL Program provides a variety of fixed and floating-rate loan options with 5, 7, and 10-year terms. Interest-only (I/O) options are also available in some situations. 


Pros and Cons of Freddie Mac Multifamily Small Balance Loans

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

Pros":

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

  • Wide variety of fixed and floating-rate options, including interest-only (I/O) options.

  • LTVs up to 80%.

  • DSCR requirements are as low as 1.25x.

  • Can be used with some affordable housing programs.

  • Real estate tax escrows are deferred for deals with an LTV ratio of 65% or less

  • Insurance escrows deferred.

  • Replacement reserve escrows deferred.

  • Freddie Mac Supplemental Loans may be allowed in some situations.

  • Allows properties with up to 50% concentration of student or military housing.

Cons:

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

  • May offer lower leverage and require higher debt service ratios than bank, CMBS, and traditional Fannie and Freddie financing for properties in Small or Very Small Markets.

  • Minimum required credit score of 650+.

  • Borrowers must generally pass stricter background checks than for other Fannie Mae or Freddie Mac multifamily loans.

  • Cannot be used with HUD Section 8 properties.

  • Replacement reserves of between $200-300 per unit, per year, are typically required.

  • Non-Freddie Mac subordinate debt is not permitted.


Prospective Freddie Mac SBL Loan Terms for 2022

  • Loan Amount:  $1 million minimum, $7.5 million maximum, $6 million - $7.5 million in Small and Very Small Markets may be permitted subject to Freddie Mac’s approval.

  • Loan Uses: Acquisitions or refinances under 100 units (over 100 units may be allowed with approval from Freddie Mac)

    Loan Terms:  

    • 20-year hybrid ARM with initial 5, 7, or 10-year fixed-rate period, OR

    • 5, 7, or 10-year fixed-rate loan

    • ARMs typically based on 6-month LIBOR with up to 1% rate adjustments every 6 months. Lifetime cap set 5% over starting rate.

  • Recourse: Non-recourse with standard bad-boy carve-outs for situations like fraud and intentional bankruptcy (carve-out waiver available with min. 1.40x DSCR and maximum 65% LTV)

  • Amortization:

    • Up to 30 years

    • Partial and full interest-only options available for highly-qualified borrowers

  • Interest Rates: Vary, but lower for properties in Top and Standard Markets and higher for properties in Small and Very Small Markets.

  • Replacement Reserves: Vary between $200-$300 per unit, per year, based on rating determined in streamlined physical risk report.

  • Borrower Legal Entity Requirements:

    • Borrowers up to $6 million: Individuals (U.S. citizens only), limited liability companies, limited partnerships, Single Asset Entities, Special Purpose Entities, tenancies in common (with up to five unrelated members), and Trusts (irrevocable trusts and revocable trusts with an individual guarantor.)

    • Borrowers more than $6 million: Single Asset Entities.

  • Additional Borrower Requirements:

    • Sponsor(s) or KPs (key principles) net worth equal to the loan amount, excluding primary residence.

    • 9 months principal and interest liquidity (before refinance or after purchase). Retirement accounts eligible for inclusion in liquidity calculation.

    • Minimum 650 credit score.

    • No bankruptcies, foreclosures, deed-in-lieu, or defaults for 7 years.

    • At least one year multifamily or commercial real estate experience.

  • Eligible Properties: 

    • Multifamily: 5+ unit market-rate multifamily properties.

    • Non-Contiguous Properties: Allowed if within same zip code and manageable as a single asset.

    • Occupancy: 90% for past 90 days (exceptions down to 85% and down to 30 days for new construction). 85% occupancy may also apply to properties with 30+ units, or acquisitions with no history of serious crime, or that have been recently taken over by sophisticated management.

    • Mixed Use: Available subject to no more than 40% non-residential income and no more than 40% of net rentable area.

    • Affordable:

      • Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restriction Agreements (LURAs) that are in either the final 24 months of the initial compliance period or the extended use period (investor must have exited for property to be eligible).

      • Properties with tenant-based housing vouchers, and properties with local rent subsidies for 10% or fewer units where the subsidy is not contingent on the owner’s initial or ongoing certification of tenant eligibility are also eligible.

    • Ineligible:

      • Seniors housing with residential services (such as assisted living, skilled nursing, memory care, or intermediate care properties)

      • Student housing (greater than 50% concentration)

      • Military housing (greater than 50% concentration)

      • Properties with Housing Assistance Program (HAP) Section 8 contracts and other project-based housing assistance payment contracts

      • LIHTC properties with LURAs in compliance years 1-12

      • Tax-exempt bonds Interest Reduction Payments (IRPs)

      • Historic Tax Credit (HTC) properties with a master lease structure

  • Market Tiers Defined:

    • Top Markets: Certain Counties (but not all) in the following MSA’s: New York, Los Angeles, Chicago, Washington D.C., San Francisco, Miami, Boston, Seattle, San Diego, Minneapolis, Denver, Portland, San Jose and Stamford, CT.

    • Standard Markets: Typically greater than 60k rental population which includes most MSA’s of significant size.

    • Small Markets: Typically between 30k and 60k rental population.

    • Very Small Markets: Typically under 30k rental population.

  • Leverage / DSCR:

    • Top Markets: Max LTV 80% for purchases, 80% for refinances, 1.20x DSCR minimum.

    • Standard Markets: Max LTV 80% for purchases, 80% for refinances, 1.25x DSCR minimum.

    • Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.30x DSCR minimum.

    • Very Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.40x DSCR minimum.

  • Prepayment Penalty: Step down or yield maintenance. Soft-step downs are also available. 

  • Interest Only: 

    • Typical maximum interest only periods include: 

      • 1 year for 5 year terms

      • 2 years for 7 year terms

      • 3 years for 10 year terms

      • 1 year available for 7 year loans

      • 2 years available for 10 year loans

      • No I/O available for 5 year loans in Small or Very Small Markets

      • Full-term interest only available under some conditions with Freddie Mac approval.

  • Assumable: Subject to 1% fee plus borrower due-diligence.

  • Rate Reductions: Available for lower leverage and higher debt service ratios. 

  • Application Fees:

    • $7,000 (Covers all third-party reports, including Appraisal, Engineering, Environmental, Operations and Maintenance Program (O&M)

    • Freddie Mac Processing Fee of 0.1%

  • Documents Required for New Loan Submissions:

    • Personal financial statement and SREO (schedule of real estate owned) for each guarantor (anyone with more than 20% interest).

    • Last 3 years operating statements.

    • Trailing 12 month, month-by-month operating statements.

    • Subject photos.

    • Current rent roll.

    • Property summary/description.


Freddie Mac Small Balance Loans vs. Fannie Mae Small Loans

When looking at an agency loan for a small multifamily property, many borrowers may be weighing and balancing the pros and cons of the Freddie Mac SBL program and Fannie Mae’s Small Loan program.

The main similarities between Fannie Mae Small Loans and Freddie Mac SBL Loans include:

  • LTVs up to 80%.

  • Non-recourse with standard bad-boy carve-outs.

  • Streamlined application and closing process.

  • Variety of fixed and floating-rate options.

  • Allowances for some student, military, and affordable housing.

  • Limited commercial space allowed.

  • Available nationwide.

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 (up to 35%).

  • Freddie Mac SBL loans have a lower credit score requirement (650+), compared to Fannie Small Loans (660-680"+), however, they have stricter background check requirements.

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

  • Fannie Mae Small Loans are more likely to be eligible for Fannie Mae supplemental financing.

  • Freddie Mac SBL loans allow for a far greater concentration of student or military tenants (up to 50% compared to 20% for Fannie Mae Small Loans).

  • Freddie Mac SBL allows for cave-out waivers for properties with a 65% or lower LTV and a 1.40x or higher DSCR.

  • Freddie Mac SBL can be issued by fewer lenders than Fannie Mae Small Loans.

  • Freddie Mac SBL has more options when it comes to the structuring of borrower legal entities.

  • Freddie Mac SBL does not allow for Section 8 properties.

Terms for Fannie Mae Small Loans include: 

  • 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, 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: 

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

    • Must also have liquidity equaling 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.

  • Assumbaility: 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. 


Read Our Multifamily Investing Blog!