The Freddie Mac Small Balance Multifamily Loan is optimized for individual buyers, LLCs, and other entities that want to buy or refinance a multifamily property with a loan less than $7.5 million but above $1 million.
In the past, loans of this size went to local banks that specialized in helping the smaller apartment building buyers. To a large extent, these loans still do end up at banks. But Freddie Mac launched this program to compete and offer a streamlined loan type with some distinct advantages over bank programs, such as non-recourse, interest only, reduced 3rd party report costs, faster closing times, relatively low closing costs, and loan terms up to 20 years. Many banks can’t offer these benefits.
Why does Freddie go out of its way to offer this? Its mandate is to offer affordable housing. That doesn’t mean the property has to be some special rent-controlled project. Rather, most deals are for your everyday multifamily. By offering more flexible, affordable financing, owners can offer more reasonable rents which induces affordable housing.
While this loan program is known as being better in medium to large markets, these loans can also work in small and even very small markets (renting population less than 30,000) but qualification criteria and rates can be tougher in these areas. Still, this loan is still worth considering for investors in all areas nationwide.
In short, anyone seeking a multifamily loan for a 5+ unit property in the U.S. should investigate this option.
Freddie Mac Multifamily Small Balance Loan (SBL) Apartment Complex Buying & Refinancing Guidelines 2021
The list of rules for this program is long, but below multifamilyloans.app has broken down the most important aspects in terms that you will probably understand even if you’re new to multifamily investing.
What is Freddie Mac Anyway?
Freddie Mac is a government-run agency whose mission it is to “provide liquidity, stability, and affordability to the U.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 a Freddie Mac Multifamily Small Balance Loan?
This loan, with its loan range of $1 million to $7.5 million would be a good choice for many types of multifamily investors. From the first-time mom and pop apartment investor buying a 10-unit building to someone who is looking to buy their 2nd or 3rd property of 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 only, with some allowances for mixed-use buildings, as discussed below in the property eligibility section.
Lenders have said that they look at the borrower and property on a holistic level, meaning they have been able to approve situations that don’t fit nicely inside the box. For instance, one lender said it was able to approve a manufactured home development, which doesn’t fit Freddie’s written policies. It’s worth inquiring with a lender even if you think you don’t meet published criteria.
That being said, some basic borrower requirements are as follows.
Types of Eligible Borrowers
Up to $6 million: Individuals who are U.S. citizens, LLCs, Single Asset Entities (typically LLCs that own just one property), limited partnerships, Special Purpose Entities (an entity created by a parent company to limit financial risk in a venture), tenancies in common with up to 5 unrelated members, irrevocable trusts and revocable trusts as long as there is an individual guarantor. Foreign nationals may also be considered when net worth and liquid reserves are 2x the standard guideline (see “Financial Standing” below for standard requirements).
Over $6 million: Single Asset Entities are eligible.
Since COVID, Freddie Mac has tightened up experience requirements. They now expect the buyer to have owned three properties for two years to qualify. For very strong cases, there may be some exceptions, but Freddie Mac has significantly pulled back on lending to first-timers. If you’re a first-time investor, see section below: “How to Qualify as an Individual, Small Investor or First-Time Apartment Buyer.”
- 650+ credit score
- No major derogatory events like bankruptcy, foreclosure, deed-in-lieu of foreclosure, or defaults in the past 7 years
- Net worth equal to the loan amount
- 12 months of principal and interest payments in reserves held in liquid accounts (retirement funds don’t count). Lenders will calculate funds after the acquisition for purchase, and before the closing for refinance (so you can’t count cash-out funds toward reserves). Note that the standard guideline is 9 months of reserves but Freddie is now requiring 12 months due to the coronavirus pandemic.
While not a published guideline, Freddie does consider non-citizens for this program. You need to have history of residence in the U.S. and you typically need twice the standard net worth and liquid cash reserves to qualify. As a foreign national, it helps to find a partner who is a U.S. citizen.
How to Qualify as an Individual, Small Investor or First-Time Apartment Buyer
Freddie Mac has gotten more strict about lending to first-time investors since COVID. But here are some things you can do to increase your chances.
- Buy in your local area. You have greater chance at success in a market you know and that you plan to personally visit often
- Get professional management. This removes some of the risk that you mismanage the property due to inexperience
- Request a lower loan-to-value, have a higher DSCR, and opt for short or no interest-only period
- Seek an experienced partner. Perhaps most effective strategy is to seek a partner with the required multifamily experience (has owned 3 properties for 2 years) and is also in the local market. Once you complete some deals as a partner, you build the experience Freddie Mac is looking for
What Properties are Eligible and Ineligible?
- 5+ unit stabilized multifamily properties in good condition
- Some mixed-use multifamily properties, as long as no more than 40% of the income or rentable area is non-residential
- Properties with tax abatements
- Senior housing with no resident services
- Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restriction Agreements (LURAs). Must be in final 24 months of initial compliance period OR the extended use period (investor must have exited the property). Available for properties of 75 units or less, and requires pre-screening by Freddie Mac
- Separate properties are financeable with the same loan if managed as a single asset and in the same ZIP code.
- Properties that have demonstrated 90% occupancy for the past 90 days. Exceptions down to 85% occupancy are considered in some cases (see “Occupancy Requirements” section)
- 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
- Properties that are in disrepair
- Non-stabilized properties
- Senior housing that offers resident services
- Student housing with more than 50% concentration (and even deals with close to this concentration will be scrutinized heavily)
- Military housing with more than 50% concentration (high concentrations will be scrutinized heavily)
- LIHTC properties with LURAs in years 1-12 of compliance period
- Properties with various project-based housing assistance payment contracts
- Properties with a master lease structure that have Historic Tax Credit (HTC) status
- Tax-exempt bonds Interest Reduction Payments (IRPs)
Pros and Cons of a Freddie Mac Multifamily SBL Loan
- Low closing costs typically under $15,000 for various third party reports like appraisal, engineering, etc.
- Longer terms available, up to 20 years
- 30 year amortization schedule, which brings monthly payments down
- Streamlined application process
- Loans are assumable under certain conditions
- Non-recourse loan with standard carve-outs
- Low minimum loan amounts
- Up to 80% loan-to-value (for example, $1.6M on a $2M property)
- 1-3 years of interest only
- The loan amounts max out at $6 million in many markets
- Freddie Mac itself must approve the loan, meaning it will take an extra couple weeks for loan processing. Some commercial loans allow for the lender to perform “delegated underwriting”, meaning the lender can approve the loan itself
- No subordinate debt (second mortgages and seller financing)
What is “Non-Recourse” and Why Is That a Big Deal?
The Freddie Mac SBL is a non-recourse loan. This means that only the property is at stake in case of default, not your personal assets. This makes the SBL quite attractive compared to the loan probably offered by your local bank.
Banks usually make recourse loans, meaning your personal house and property are on the line if you fail to pay the multifamily mortgage.
This offers the investor — especially those doing this for the first time — some peace of mind. Knowing that your family’s home 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.
Freddie Mac Small Balance vs Fannie Mae Small Loans Program
- Freddie Mac offers step-down prepayment penalties while Fannie requires yield maintenance prepays most of the time (see section “Prepayment Penalties”)
- Freddie Mac allows for abbreviated 3rd party reports which cost less
- Loan quotes are typically locked in at application. That rate is valid as long as you submit your documentation to Freddie Mac via the lender on time. With Fannie Mae, your rate floats until later on in the application process
- Fannie Mae lenders can approve the loan themselves, whereas Freddie Mac lenders send the package to Freddie itself to review after the lender approves it. This can take an additional couple of weeks.
- In some cases, Freddie Mac can offer higher LTVs and lower DSCRs
- Fannie Mae goes up to a $6 million loan amount; Freddie goes to $7.5 million
- With Fannie Mae, you can add a supplemental mortgage on top of the primary mortgage to access equity. This isn’t an option with Freddie Mac.
- Freddie Mac will lend to first-time buyers in some cases, but Fannie Mae requires experience. If you are a first-time buyer, try Freddie Mac or a bank loan
- Freddie Mac requires 12 months principal and interest liquid reserves, Fannie Mae requires 18 months
Freddie Mac Small Balance Rates & Pricing
At the time of this writing, we received a rate quote in the high 3% to low 4% range depending on the program. The programs were
- 10/30 Fixed IO: 10 year fixed, then 20 year adjustable. First 3 years are interest-only.
- 10/30 Fixed: 10 year fixed rate, then 20 years adjustable rate
- 10/10 Hybrid: 10-year fixed rate, then 10 years floating
How Long Does it Take To Close a Freddie SBL Loan?
This depends on the lender, the property, and the borrower. But some lenders can close these in 30-60 days. It’s important to turn in a complete package upfront and be responsive to any questions from the lender.
Loan terms and amortizations are some of Freddie SBL’s strong points. Loan terms (lengths) are 5 to 20 years.
Fixed-rate loans are available for 5, 7, or 10 years.
Adjustable-rate mortgages (ARMs)
If you want a longer loan term, use the hybrid adjustable-rate mortgage (ARM). ARMs have an initial fixed period, then adjust based on current market conditions.
For ARMs, the initial fixed periods are 5, 7, or 10 years, then adjust for the remaining term of 20 years.
Both fixed and ARMs “amortize” at 30 years, meaning you make payments as if it were a 30-year loan. This gives you lower payments, but come with a catch. You don’t pay off the loan by the end of the loan.
Instead, you have a balloon payment, or a lump-sum due to pay off any remaining principal. For instance, if you have a 10 year fixed loan of $1.5 million, you would owe about $1.1 million in a lump sum at the end of your loan. That’s why most investors sell or refinance before the end of the actual term: it can be quite a large chunk of money.
Freddie SBL offers the following hybrid ARM loan options, all with 20 year total terms:
- 5 + 15 (5 year fixed then 15 years floating, based on current rates at the time)
- 7 + 13
- 10 + 10
The initial rate is determined at time of application and lock. The lender will also set the “margin” or “spread”, meaning the percentage above an “index”.
Index: A measurement of the current economic environment expressed in a rate
Margin / Spread: The additional interest rate the lender adds to the Index as profit
You may have heard that Freddie SBL loans are based on the LIBOR index, but that’s no longer the case. The agency just started using SOFR for all its SBL loans on September 1, 2020.
So how does this affect your loan if you choose an ARM?
Say you got a 5-year ARM today at 3.75% with a future margin after the fixed period of 3%. Now assume five years from now, SOFR is 1.0%. In year 6, 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% five 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 every 6 months after the initial fixed period. The rate can go up or down as much as 1% every 6 months, and there’s a lifetime cap of 5% above the initial start rate.
For instance, if you received a 4% start rate on a 5-year ARM, your rate could only go up to 5% upon the first adjustment. It could adjust up to 6% six months after that. And it could never go above 9% because the lifetime cap kicks in (4% initial rate plus 5% lifetime cap).
How to Get a Freddie Mac Small Balance Multifamily Loan
The easiest way to see if you’re eligible is to complete the below form and multifamilyloans.app will match you with a top lender. Otherwise, you can do some research on the 12 Freddie SBL lenders to choose the one that is right for you.
Can I combine Seller Financing or Secondary/Subordinate Financing with this loan?
Subordinate financing is not allowed with this program. If you have a second mortgage lined up or the seller is willing to offer partial financing, you should look at other options for your financing. The maximum loan-to-value with Freddie SBL is 80%.
How Much Money 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 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.
- Liquid reserves: You must have 12 months of principal and interest payments in reserves. For purchases, you have to have this amount after closing. For refinances, you have to have these reserve levels 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 $68,400 in liquid reserves (checking, savings accounts) after the down payment and closing costs.
- Closing costs: About $26,200 in this case (See “Closing Costs” section for greater detail)
- Replacement reserves: May not be required. Check with the lender
- 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 $444,600 cash on hand 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 the income of the property. In some multifamily lending, the lender uses the borrower’s personal income and debt payments. But for Freddie SBL, the property’s income is used.
In top markets, you need a debt service coverage ratio (DSCR) of at least 1.20x. This means that the property must take in 20% 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 $72,000 per year to qualify.
What are DCR / DSCR requirements for Freddie Mac Small Balance?
Debt coverage ratio (DCR), also called debt service coverage ratio (DSCR) requirements vary widely depending on market and loan type. Following is a list of minimum DSCRs.
|Market||ARM/Fixed DSCR||Full-term IO DSCR|
|Very Small Markets||1.40x||1.50x|
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 DSCR.
What are LTV requirements for Freddie Mac Small Balance?
LTV or loan-to-value requirements vary by market size and loan type. The formula for LTV is
Loan amount / Purchase price
So the LTV of a $2 million property with a $1.6 million loan is 80%.
|Market||ARM/Fixed LTV Acquisition and (Refinance)||Full-term IO LTV|
|Top Markets||80% (80%)||65%|
|Standard Markets||80% (80%)||65%|
|Small Markets||75% (70%)||60%|
|Very Small Markets||75% (70%)||60%|
What are “Top Markets” and “Small Markets” etc. for Freddie Mac Small Balance Loans?
Freddie is more comfortable lending in larger markets, as you may have guessed by their lending criteria. If you’re in a smaller market, it’s worth checking with your lender if Freddie SBL is right for you. You may be better off with a Fannie Mae multifamily loan program, which generally does not differentiate between large and small markets in its loan rates and terms.
Markets are based on size of the rental population as determined by the Census Bureau.
Top Market: Counties located usually within the greater metro areas of Miami, San Francisco, San Diego, Los Angeles, San Jose, Seattle, New York, Chicago, Washington D.C., Boston, Minneapolis, Denver, Portland, Stamford and Sacramento.
Standard Market: Rental populations of 60,000 and greater receive this designation. Example cities are Dallas, Philadelphia, Houston, Atlanta, Charlotte, Phoenix, and Las Vegas
Small Market: Counties with rental populations between 30,000 and 60,000, which encompass cities such as Boulder, Colorado, Shreveport, Louisiana, Wichita, Kansas, Des Moines, Iowa, and others.
Very Small Market: Cities under 30,000 in rental population like Idaho Falls, Idaho, Flagstaff, Arizona, Sioux City, Iowa, and Wheeling, West Virginia receive this designation.
What Geographic Areas are Best for Freddie Mac Multifamily Small Balance?
Top and Standard Markets as defined above are the best areas to use Freddie SBL. You will get higher LTV limits, lower DSCR minimums, and generally have an easier time getting approved. If you meet all the criteria for Freddie, but you are buying in a small market, look into the Fannie Mae Small Loan, which isn’t so strict outside of major metros.
What Documentation is Required for Freddie Mac SBL?
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
- Last 3 years operating statements
- Property description
- Trailing 12 month operating statements (T12 or TTM)
- Photos of the property
- Monthly proforma – how you plan to manage the property for the next 12 months (although most weight will be given to the current operations. You can’t get a loan amount based on future NOI)
- Broker’s Offering Memorandum on the property you are buying
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. Also, a real estate resume that speaks of successes in real estate
- 2 years personal/corporate tax returns
- Bank statements
Above, we mentioned that student and military tenant concentration is an issue. Even if you are at 40% tenant concentration, you may not be approved for the Freddie Mac SBL. Freddie does not want the property half vacant because a military base closes or everyone graduates or goes on summer vacation. Tenant concentration may also be an issue if half the tenants work for one company. As an investor, no matter what loan you choose, look for a property in a locale that is well-diversified economically.
You will run into the same problems if you have a master lease agreement on the property. That’s when one tenant like a corporation leases multiple units. If that entity pulls out of your property, you’re stuck with a lot of empty units.
You want to avoid mass vacancies.
The property must prove 90% physical occupancy for the trailing 3 months prior to underwriting.
Exceptions down to 85% occupancy are available for:
- New construction properties in a Top Market
- Properties with fewer than 30 units
- A purchase transaction where 1) A more sophisticated management structure is being put in place by the buyer; 2) The property is current charging below-market rents; 3) Property has not experienced wide occupancy swings in the past; 4) No history of serious crime on the premesis
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.
For loans between $6 million and $7.5 million, the property must be 75 units or fewer, and in Top and Standard Markets as defined by Freddie Mac.
Besides the above, there are no stated unit limits. But unit counts will be naturally limited since the loan amount must be below $6 million to avoid the 75-unit limit. However, it’s possible to put a larger amount down on a bigger apartment complex to end up with a loan amount below $6 million, if you’re above the 75-unit limit for larger loan amounts.
How Long can I Lock the Rate?
Your lock length can be between 60 and 120 days. A 120-day lock means you have up to 120 days to close and fund the transaction once you choose to lock.
The lock process is one of the stronger features of the Freddie Mac Small Balance Loan. The lender can lock the loan at application so that you know your final rate. As long as you provide documents within about 45 days, you can keep your rate. With Fannie Mae’s competing program you must wait for an approval to lock, which could happen 30-45 days into the loan process, exposing you to rising rates.
Is Interest Only available?
- 5 year fixed: 1 year IO
- 7 year fixed: 2 year IO
- 10 year fixed: 3 year IO
Full-term IO is available subject to Freddie approval. In these cases, LTV is reduced and DSCR levels are higher:
- Top Markets: DSCR 1.35 & maximum LTV 65%
- Standard Markets: DSCR 1.40 & maximum LTV 65%
- Small Markets: Minimum DSCR 1.40 & maximum LTV 60%
- Very Small Markets: Minimum DSCR 1.50 & maximum LTV 60%
No IO is available for 5-year terms in small and very small markets as defined by Freddie Mac.
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 5 year hybrid adjustable loan (5 year fixed then 15 year floating rate) has a prepayment schedule as follows:
5-4-3-2-1, then 1%
This means you would pay a penalty of 5% of the loan amount the first year if you refinance or sold the property, 4% the second year, and so on. After 5 years, you would pay a 1% penalty at any time during the next 15 year floating period. The last 1% might be unavoidable since most multifamily owners would refinance or sell prior to the last day of the loan.
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. With Freddie Mac SBL, you can get a slightly lower interest rate by choosing YM, but it comes with bigger risks.
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 what you’d expect to pay.
- $1,200 Freddie Mac processing fee (10 basis points or 0.10% of the loan amount)
- $7,000 for third party reports such as engineering, appraisal, environmental
- $6,000 for closing/legal
- $12,000 origination fee (1% is typical and charged by the lender)
- $26,200 total cost above and beyond the down payment of 20%
There also may be a seismic report fee where required.
How Does The Approval Process Work?
You apply with the lender, who then reviews the package and quotes you rates and terms if it believes you can be approved.
The lender then underwrites the file, asking for any needed documentation. It then sends the package to Freddie Mac for its review which can take a couple weeks.
Typically, if the lender approves the transaction, it’s fairly certain that Freddie will do the same. Still, Freddie itself will give final sign-off.
The loan goes to closing, signing, and funding, and then you own the property.
Is Rehab Available?
Neither Freddie Mac or Fannie Mae small balance loans allow for extra funds to rehab the property. These are known as bridge loans — loans which are based on future value. If you need rehab funds, you’ll need to raise those yourself via a partner, or seek a bank loan that offers repair programs.
An annual financial report is required. Freddie Mac wants to know how the property is being managed and if the asset is holding value.
Freddie Mac Multifamily Small Balance Refinance
There are a few restrictions. If you’ve owned the property less than 3 years and are cashing out more than 15% of the current loan balance, your maximum loan-to-value is 75% and you need a DSCR of 1.25x. After 3 years, you can go to 80% LTV and 1.20x DSCR if Freddie allows it in your market. This is important to know if you are planning to cash out the property quickly after acquisition by increasing NOI.
The lender will also want to know how you got the increased appreciation. If you’ve truly made the property more efficient with capital improvements and better management, that’s a good sign. You may not be approved for a cash-out refinance if you’ve simply waited for appreciation in the market, known as cap rate compression.
How do I Apply?
Many lenders offer the Freddie Mac Small Balance program. Each may have its own slight variations in leniency and relationship with Freddie Mac. To get the best experience, you could shop around for dozens of lenders, or you could leave that to us.
Applying for the Freddie Mac 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.