What is a Fannie Mae Multifamily ‘Small Loan’?
Fannie Mae Small Loans have gained market share in recent years in a market once dominated by individual banks and credit unions.
In 2019, 8% of all smaller apartment loans were from either Fannie Mae or Freddie Mac (“the agencies”), up from 6% in 2016.
The benefits are clear: Fannie offers up to 80% financing nationwide, 30-year fixed rate in a non-recourse loan.
Fannie Mae has also streamlined the application process and lowered cost for smaller apartment buildings, knowing that these investors don’t want to spend as much on closing costs as someone purchasing a $25 million property.
This loan is opening up opportunities for more and more investors to build wealth via multifamily real estate. Will you be one of them?
Fannie Mae Small Loans / Small Balance Multifamily Apartment Complex Buying & Refinancing Guidelines 2021
The list of rules for this program is long, but below, Apartment Loan Pro has broken down the most important aspects in terms that you will probably understand even if you’re new to multifamily investing.
What is Fannie Mae Anyway?
Fannie Mae is a government-run agency whose mission it is to “deliver stability and affordability to America’s housing market.” As such, this entity creates relatively lenient rules around multifamily lending. This approach makes sense. By offering attainable apartment building finance terms and low rates nationwide, it expands the availability of affordable housing to renters. As a multifamily buyer, you benefit too.
Who qualifies for the Fannie Mae Small Balance / Small Loan Multifamily Program?
This loan, known a simply the “Fannie Mae Multifamily Small Loan” offers a loan range of $750,000 to $6 million. Its purpose, according to Fannie Mae, is to support the smaller apartment building investor, thereby increasing housing affordability in strategic locations nationwide.
The “Small Loan” program would be a good choice for many types of multifamily investors. From the newer mom and pop apartment investor buying a 10-unit building to an experienced investor looking to buy 50+ units and scale up, this is a fantastic loan.
This loan is not for someone looking to buy a retail or office building — multifamily (5+ units) only, with some allowances for mixed-use buildings, as discussed below in the property eligibility section.
Fannie Mae created this product as an alternative to its standard multifamily loans program, which starts at $3 million and requires more documentation.
If you’re looking at properties for which a $750,000 to $6 million loan would suffice, this could be a great program for you.
Types of Eligible Borrowers
- Individuals who are U.S. citizens
- Single asset entities (such as LLCs that own one property)
- Multi-asset entities, though single-asset entities are preferred
- Some foreign buyers if they have U.S.-based partners
Multifamily Ownership Experience
Fannie Mae will require previous multifamily experience, defined as owning at least one similar-sized property for two years. If you are buying an apartment building for the first time, it’s wise to set yourself up for success as follows:
- Find a partner in your area with the required multifamily experience
- Become a partner to someone else who is buying a property
- Start small and use a bank loan to buy your first property
- Hire professional 3rd party management
- Obtain extra liquid reserves, make a bigger down payment, and demonstrate a higher DSCR
Financial Standing / Net Worth / Liquid Reserves
- 680+ credit score (varies by lender)
- For the most part, no history of bankruptcy, foreclosure, tax liens or serious late payments or delinquent accounts
- Net worth of the borrower and all key principals must match the loan amount. Yes, if you need a $1.2 million loan, you need to show a $1.2 million net worth
- Post-closing liquid assets (excluding cash-out funds on a refinance) equal to 18 months of principal and interest payments
Foreign Ownership of Purchasing Entities
Fannie Mae allows foreign ownership of the entity that is purchasing the property. However, at least one owner in the entity must be a U.S. citizen or entity.
How to Qualify as an Individual, Small Investor or First-Time Apartment Buyer
If you’re a relatively high-net-worth U.S. individual looking to buy in your local market, and the property is in good condition and has demonstrated a high occupancy rate for the last 90 days, the Fannie Mae Multifamily Small Loan could be a good choice.
But you might run into a problem if this is your first time buying an apartment building.
Fannie Mae requires prior experience managing a similar sized property. You might think this is a chicken-and-egg scenario: you can’t get a loan without experience, but you can’t get experience without a loan.
Fortunately, you have some options. You could:
- Purchase your first multifamily property via a bank loan and build 24 months of experience. Banks make their own lending rules and may not rule out first-time buyers
- Find another multifamily investor and help fund their deal by becoming a key principal (loan guarantor) in their Fannie Mae transaction
- Bring on a partner who has the necessary experience
- Scale down and manage a small 5-15 unit property in your local area; see if you can get approved for the Freddie Mac SBL program
You wouldn’t apply to be a President or CEO in an industry you’ve never worked in before. Likewise, Fannie Mae wants to see solid experience on your resume before funding the majority of your multifamily building.
Pros and Cons of a Fannie Mae Small Multifamily Loan
- Low interest rates
- Finance capital improvements
- Up to 30-year, fully-amortizing terms (much like a 30-year fixed home loan)
- Streamlined application process
- Loans are assumable under certain conditions
- Non-recourse loan with standard carve-outs
- Low minimum loan amount
- Up to 80% loan-to-value (for example, $1.6M loan on a $2M property)
- Fannie Mae-approved lenders can underwrite and approve the loan
- Can add a supplemental loan after 12 months
- Can be better than Freddie Mac Small Balance outside major metros
- 90% occupancy for the previous 90 days
- $10,000 application deposit
- Rate lock deposits of 1-2%, refundable at closing
- Replacement reserves of $250 per unit
- 18 months liquid reserves (principal and interest payments) required
What is “Non-Recourse” and Why Is That a Big Deal?
The Fannie Mae Multifamily Small Loan is a non-recourse loan. This means that only the property is at stake in case of default, not your personal assets. This makes this program quite attractive compared to the loan probably offered by your local bank.
Banks usually make recourse loans, meaning your personal house and assets are on the line if you fail to pay the multifamily mortgage.
This offers the investor some peace of mind. Knowing that your family’s well being isn’t at risk is a priceless feature to many apartment building buyers.
Note that standard “bad boy carve-outs” apply, meaning that if you do something to intentionally devalue the property, defraud the lender, or grossly mismanage the business, the lender can come after your personal assets.
Fannie Mae Small Loans vs Freddie Mac Small Balance Program
- Fannie Mae’s minimum loan amount is $750,000. Freddie’s is $1 million.
- Fannie’s max loan is $6 million; Freddie’s is $7.5 million
- Freddie Mac allows for abbreviated 3rd party reports which cost less
- With Fannie Mae, you must float your rate during loan processing. With the Freddie Mac Small Balance Loan program, quotes are typically locked in at application.
- Fannie Mae small balance loan terms go up to 30 years. Freddie Mac has a 20 year term max
- Fannie Mae lenders can approve the loan themselves via “delegated underwriting,” whereas Freddie Mac lenders must send the package to Freddie itself for review. This can take an additional couple of weeks.
- In some cases, Freddie Mac can offer higher LTVs and lower DSCRs than Fannie Mae. But Fannie usually does better than Freddie in smaller markets
- Freddie Mac requires 12 months principal and interest liquid reserves (up from the typical 9 months due to COVID-19), Fannie Mae requires 18 months
Fannie Mae Small Loan Rates & Pricing
Your rate will depend on your “tier”. The lower your LTV and higher your debt service coverage ratio (DSCR), the lower your rate.
|66-80% LTV (75% for refi)||1.25x||Tier 2|
|56-65% LTV||1.35x||Tier 3|
|55% LTV||1.55x||Tier 4|
There is about a 0.2% improvement in rate for each higher tier.
How Long Does it Take To Close a Fannie Mae Multifamily Small Loan?
This depends on the lender, the property, and the borrower. But some lenders can close these in 45-60 days. It’s important to turn in a complete package upfront and be responsive to any questions from the lender.
One of the most attractive features of the Fannie Mae Small Loan is that you can get a 30-year fixed, fully amortizing loan, just like you can on a residential home. However, shorter loan terms generally come with lower rates. A full list of fixed-rate options follows.
- 5-year fixed
- 7-year fixed
- 10-year fixed
- 12-year fixed
- 15-year fixed
- 30-year fixed
All fixed and adjustable options come with a 30-year amortization, meaning you make the payment as if it were a 30-year loan. This reduces your payment but leaves you with a large balloon payment at the end of the term, for any fixed loan besides the 30-year. That’s why most multifamily owners sell or refinance prior to the end of their loan term.
Adjustable-rate mortgages (ARMs)
Fannie Mae ARM loans work much like a residential adjustable-rate loan. They have a fixed period followed by an adjustable period for the remaining term.
- 7-year ARM
- 10-year ARM
Fannie Mae Small Loans offer the following hybrid ARM loan options, both with 30-year total terms:
- 7 + 23 (7-year fixed then 23 years floating, based on current rates at the time)
- 10 + 20
The rate for the initial fixed period is determined at time of lock. At that time, the lender will also determine the “margin” or “spread”, meaning the percentage above an “index.” The margin affects your rate when you enter the adjustable period seven or 10 years down the road.
Index: A measurement of the current economic environment expressed in a rate. Fannie uses the SOFR Index.
Margin / Spread: The additional interest rate that the lender adds to the Index as profit.
So how does this affect your loan if you choose an ARM?
Say you got a 7-year ARM today at 3.75% with a margin of 3%. Now assume seven years from now, the SOFR Index is 1.0%. In year 8, your rate would adjust to 4% (1.0% SOFR index + 3% margin). Sounds pretty low, but we’re also seeing all-time-low rates in the market right now. If SOFR were 2.50% seven years from now, your rate could rise substantially.
But keep in mind that there are limits to how much the adjustable rate can rise (or fall). Rates start fluctuating monthly after the initial fixed period. The rate can go up or down as much as 1% every month (although rates don’t typically change this quickly. There’s a lifetime cap of 6% above the initial fixed rate.
For instance, if you received a 4% fixed-period rate on a 7-year ARM, your rate could only go up to 5% upon the first adjustment. It could adjust up to 6% one month after that. And it could never go above 10% because the lifetime cap kicks in (4% initial rate plus 6% lifetime cap).
How to Get a Fannie Mae Small Balance Multifamily Loan
Many lenders offer the Fannie Mae Small Balance, however not all lenders are equal. Some will take longer to process your loan than others, and some might offer different rates and fees.
Many multifamily owners and investors call dozens of banks looking for the right loan, rate, and fees. This could take days, weeks or months. Imagine trying to find the best offer out of:
- 12 banks
- 5 loan programs
- 8 rate/fee structures within each program
That’s 480 loans structures you have to sift through!
That’s where Apartment Loan Pro comes in. We scour programs from hundreds of banks to find what should work for your scenario that also comes with a lot of value.
Maybe it will be the Fannie Mae Small Balance, maybe it will be another loan type. But our expertise means that you don’t have to become a multifamily finance expert. You have a lot of other things to worry about.
Complete this form and we’ll start the research!
Can I combine Seller Financing or Secondary/Subordinate Financing with this loan?
You can get a supplemental loan from Fannie Mae after 12 months. A supplemental loan is an additional loan — somewhat like a 2nd mortgage or HELOC on a residential property. It enables you to access equity in the property in the form of cash and is cheaper than refinancing the primary mortgage (and helps you avoid prepayment penalties).
While this is an attractive offering, Fannie Mae does not allow you to secure secondary financing or seller financing for acquisition.
How Much Cash do I Have to Have On Hand to Use This Program?
For an example, let’s look at an example of a $1.5 million apartment complex with 30 units, with a maximum loan-to-value of 80%.
- Down payment: $300,000 (20% of $1.5 million)
- Net worth: You must also have a net worth equal to the loan amount. So taking the example above, you would need a net worth of $1.2 million. This does not need to be liquid.
- Liquid reserves: You must have 18 months of principal and interest payments in reserves. For purchases, you have to have this amount after closing. For refinances, you have to have it before closing, meaning you can’t count cash-out funds from the property for the reserve requirement. So with an example payment on the above scenario of $5,700 per month, you would need $102,600 in liquid reserves (checking, savings accounts) after the down payment and closing costs.
- Replacement Reserves: Fannie Mae requires $250 per unit (more or less) per year for unforeseen repairs. For 30 units, that would be an extra $7,500.
- Closing costs: About $29,000 in this case (See “Closing Costs” section for greater detail)
- Tax and Insurance reserves: 6-9 months. Let’s call it $50,000
Boiling it all down, you need a net worth of $1.2 million and around $489,100 liquid funds to close a $1.5 million apartment building purchase.
How Much Income Do I Need to Qualify?
Apartment loans are not like residential lending. The basis of qualification is typically the income of the property. In some multifamily lending, the lender uses the borrower’s personal income and debt payments. But for Fannie Mae, the property’s income is used.
In top markets, you need a debt service coverage ratio (DSCR) of at least 1.25x. This means that the property must take in 25% more than its debt payment obligations.
For instance, if your proposed payments were $5,000 per month, or $60,000 per year, the property’s annual net operating income (NOI) would have to be $75,000 per year to qualify.
What are DCR / DSCR requirements for the Fannie Mae Multifamily Small Balance / Small Loan?
Debt coverage ratio (DCR), also called debt service coverage ratio (DSCR) requirements are a minimum of 1.25x. If your DSCR is higher, you may get a lower rate.
DSCR is the relationship between property income and payments.
For instance, if your property’s proposed yearly payments (debt service) were $100,000, you would need $125,000 in net operating income to qualify. (Net operating income or NOI is your income after regular expenses.)
Breaking it down, DSCR looks like this:
DSCR = Income – Expenses (NOI) / Debt Service (Payments)
Annual amounts are used for the DSCR calculation.
What are LTV requirements for Fannie Mae Small Loans?
LTV or loan-to-value requirements go up to 80% for purchase transactions and 75% for refinance. However, you may get a better rate if your LTV is below 65%.
Are there Geographical Restrictions to the Fannie Mae Small Loan?
The Fannie Mae Small Loan is available nationwide. However, you may experience different underwriting requirements in different areas.
Higher risk areas: You may need a pre-review (direct permission from Fannie Mae before you lock) in markets where it has high concentration of properties or areas it views as higher risk. Some of these markets are Houston, Odessa, Midland, San Bernardino, Riverside, Kennewick, Oklahoma City, Atlanta, Fayetteville, Wyoming, Michigan, Indiana, Ohio (excluding Columbus) Las Vegas, Tulsa, Atlanta, New Orleans, Wichita Falls, Puerto Rico, U.S. Virgin Islands, Guam.
Tertiary markets: Fannie Mae generally is best for primary and secondary markets (populations of 200k+). You may be approved in tertiary markets if you have lower LTVs and higher DSCRs.
What Documentation is Required for Fannie Mae Multifamily Small Loans?
Because the basis of the loan is property income, many of the required documents involve verification of intake and outflow of the property. If you are buying, you will need to ask the seller or broker for some of this documentation, as it is not public record.
- Current rent roll/Occupancy report with lease start and end dates
- Last 3 years operating statements
- Property description
- Trailing 12-month operating statements (T12 or TTM)
- Photos of the property
- Proforma – how you plan to manage the property going forward (although most weight will be given to the current operations. You can’t get a loan amount based on future NOI). This includes a 12 month future budget.
- Purchase and sale agreement
- Real estate tax bills
- Vendor contracts for 3rd parties servicing the property such as landscapers
You’ll also have to verify the financial status of anyone with more than 20% interest in the entity that is buying the property, with:
- A personal financial statement (PFS)
- A schedule of real estate owned (SREO) — meaning a list of properties already owned by the buyers, current values and debt on each.
- A business plan for property ownership: how will you ensure successful management, upkeep, and operating income?
- Various forms such as a credit pull authorization and property questionnaire
- Liquidity verification, i.e. 2 months bank statements
- Buying entity org chart and documents
What Reports are Required?
- Streamlined physical needs assessment
- Standard environmental assessment
- Structural engineering report
- Zoning report
- Property inspections required by Fannie and the lender
What Properties are Eligible and Ineligible?
- 5+ unit multifamily properties
- Some mixed-use multifamily properties, with a maximum of 35% of the net rentable area and 20% of effective gross income for non-residential space
- Manufactured housing communities
- Multifamily Affordable Housing (MAH)
- 10+ unit properties that have demonstrated 90% occupancy for the past 90 days
- 5-9 unit properties with no more than 1 vacant unit as of the commitment date and an average occupancy by Qualified Occupants of at least 90% for the 12-month period immediately before the Commitment Date
- Properties with local rent subsidies for 10% or fewer units, as long as the subsidies are not contingent on the owner continually re-certifying tenant eligibility
- Properties with income or rent restrictions when all related funds have been disbursed
- 1-4 unit properties — these would fall under residential lending guidelines.
- Office buildings
Fannie Mae will weigh the risk of any property with greater than 10% of the units leased to corporations, partnerships, trusts, etc. Likewise, no more than 5% of units should be leased to any single entity.
Fannie Mae will also review any property with more than 40% concentration of any type of tenant: student, military, a single employer, etc.
The property must prove 90% physical occupancy for the trailing 3 months prior to underwriting.
Management Requirements for Fannie Mae Small Balance Loan
Fannie Mae wants to know that you have experience managing a similar sized property. These requirements will change depending of if you are a local or non-local borrower, the size of property you’ve managed, and the size property you are buying.
- 5-50 units: Small property
- 51-100 units: Medium property
- 101 or more units: Large property
A non-local buyer must have 2 years multifamily ownership or property management experience with a property of similar size or larger
Professional property management or qualified on-site manager is required if the property is
- Less than 10 units and is purchased by a non-local buyer
- 10 or more units with a non-local buyer or a local borrower with less than 2 years experience managing a similar size or larger property.
A local buyer with adequate management experience can manage a property themselves, it the property is less than 10 units.
How Many Units Can be Financed?
The property must be 5 or more units. Otherwise, it’s considered a residential property and subject to those guidelines.
There are no stated upper unit limits. But unit counts will be naturally limited since the loan amount must be below $6 million.
How Long can I Lock the Rate?
Rate locks are available from 30-180 days or longer with an extended lock.
Is Interest Only available?
Interest only or “IO” is available on a case by case basis. It may be granted for tiers 3 and 4 below
|66-80% LTV (75% for refi)||1.25x||Tier 2|
|56-65% LTV||1.35x||Tier 3|
|55% LTV||1.55x||Tier 4|
But Fannie Mae just doesn’t give IO to anyone. Generally you can be approved if you have good multifamily experience, lower leverage (lower LTV) on a newer property. The better your scenario, the longer IO term you may get. For instance, 3 years of IO payments rather than 1 or zero.
Keep in mind that your payment will increase substantially after the interest-only period. The loan will convert to a 30-year amortization, meaning you will start paying mortgage principal along with interest.
To give an example of how much your payment increases, on a $1.2 million loan amount at 4%, your payment would go from about $4,000 per month up to over $5,700 per month. Be prepared for this jump in monthly outlay.
What are the Prepayment Penalties?
Prepayments are either step-down or yield maintenance.
Step-down means penalties get smaller each year that the loan ages. For example, a 7-year hybrid adjustable loan (7 year fixed then 23 year floating rate) has a prepayment schedule as follows:
Lock-out in the first year, then 4-3-2-1-1-1
This means you are not allowed to refi or sell in the first year. If you do, you are subject to a penalty equal to 5% of the loan amount. Then, you would pay 4% of the loan amount the second year, 3% the third year, and so on. In years 6 and 7, you would pay a 1% penalty upon a refinance or sale.
No prepayment penalties are due after the initial fixed period on ARMs.
As you can imagine, paying off the loan early could get expensive fast. If you refinance or sold during the first year on a $1 million loan, you’d pay a penalty of around $50,000. This doesn’t go toward your principal and it’s not refundable — it’s just gone. So you want to make sure you’re in it for the long haul before committing to this or another multifamily loan.
The other type of prepayment penalty is yield maintenance (YM). YM means that you pay what you would have paid in interest had you kept the loan for the entire term. Again, this could get spendy if you pay off early.
One lender reported a yield maintenance penalty of nearly $500,000 on a remaining balance of $2.7 million. The loan had 5 years left and the borrowers had to pay what was due for the rest of the term. This was essentially a 16% prepay penalty, versus maybe 3% if it were a 10 year loan with a step-down penalty. Ouch.
Unlike residential loans, prepayment penalties are quite common in the commercial world. They are practically outlawed in residential lending, which is why so many new multifamily investors who have only owned a 1-4 unit property are surprised to hear how hard it is to avoid a prepayment penalty.
Still, if done right, you can minimize risk of paying these large sums. Buy and hold.
What are the Fees and Closing Costs?
Let’s look at a loan amount of $1.2 million. Here is an estimate of what you might pay.
- $10,000 application deposit which covers appraisal, zoning report, environmental engineering report, structural engineering report, and inspections
- $7,000 legal costs
- $12,000 origination fee (1% is typical and charged by the lender)
- $29,000 total cost above and beyond the down payment of 20%
There also may be a seismic report fee where required. Some lenders may require a good faith deposit of 1-2% at rate lock which can be applied to closing costs.
How Does The Approval Process Work?
You apply with a lender, submitting a complete loan package, including your personal financial statement, your real estate resume, business plan, and all documentation regarding the property.
The lender then underwrites the file, asking for any needed documentation. When you receive a commitment, you can lock the rate.
The lender can then approve the file itself via “delegated underwriting,” meaning it can make the approval decision on behalf of Fannie.
The loan goes to closing, signing, and funding, and then you own the apartment building.
Is Rehab Available?
Substantial rehab funds are not available with this loan. Some lenders may allow an escrow holdback (funds held by a 3rd party) to do some repairs on the property.
Fannie Mae Multifamily Small Loan Refinance
You will likely need most of the same documentation to refinance a property as to refinance. The main difference is that you are capped at 75% LTV for a refinance vs 80% for a purchase.
How do I Apply?
Applying for the Fannie Mae small balance apartment loan may seem intimidating. But it’s Apartment Loan Pro’s mission to demystify the process. Part of that is linking you to the best lender for your situation.
Complete the short questionnaire below and we will connect you with a knowledgeable lender who will guide you through the process. You could be a multifamily investor sooner than you think.