Fannie Mae vs Freddie Mac Multifamily Loans
By Terry Painter, Mortgage Banker, Author of “The Encyclopedia of Commercial Real Estate Advice" – Wiley Publishers. Member of the Forbes Business Council
When I started lending on Fannie Mae and Freddie Mac Multifamily loans back in 2004, I was surprised that these two loan programs had more terms and qualifications in common than differences. What also surprised me was how those few differences could make one program or the other so much more favorable or kill the deal for my borrowers. Be sure to go over the chart above to determine which loan program is the best fit for you, or maybe neither is a fit. You can read more details on Fannie and Freddy's terms and requirements – how they are alike and how they differ below.
What Fannie Mae and Freddie Mac Multifamily Loans Have in Common
Both loan programs are called Agency loans, and both are GSE’s, which stands for Government Sponsored Enterprises. Most people think that Fannie and Freddie are owned and run by the United States Government, but this is not true. Both are run by themselves and both are publicly traded companies that had bankruptcies during the great recession. Both GSE’s were saved by the US Government which doesn’t own them but oversees their finances in conservatorships. They are both doing exceptionally well today, but are expected to be watched closely by the federal reserve for another 10 – 15 years.
Another misunderstanding is that Fannie and Freddie make the loans. They don’t! Both have approved lenders to do this for them. All Fannie and Freddie really do is securitize their loans. This entails guaranteeing the loans, so they can be bundled and sold as high credit rated mortgage-backed security bonds on Wall Street. It's actually the act of guaranteeing the financing with the backing of the United States Government that allows these loans to have such a high credit rating thus making the bonds representing them a very safe and popular investment.
Loan Size – Fannie and Freddie loans both range from $1M to $100M or even more with both having a small and large loan program. Fannie’s small loan program goes up to $6 million, and Freddie’s goes up to $7.5 million. A huge plus with Freddie is that you can lock the rate at application in the small loan program, but not in the large loan program.
Green and Affordable Loan Program – If your building is green or has 20% or more units with affordable rents, you will qualify for 0.40% off the rates on both programs. You will actually have to have about 65% of the requirements of a green certified building to qualify for both Fannie and Freddie’s green program. To qualify for affordable rents, you have to have a minimum of 20% of the tenants paying affordable rents through section 8 vouchers.
Amortization – Both are 30 years, however you can request a shorter amortization as long as the net operating income will support the loan payments.
Interest Only Payments – When buying overpriced apartment buildings today, it can really be a plus to get interest only financing giving you much lower payments. Both Fannie and Freddie loan programs have from 2 – 10 years of interest only payments based on LTV and DSCR. Keep in mind that Freddie factors in the size of the market or city in this equation so in smaller markets with small populations around a 100,000 they allow fewer years of interest only payments and in very small markets under 50,000 population even fewer years of I/O payments. Where for large cities like, Seattle, New York, San Francisco and Chicago, you can get up to 10 years of interest only payments.
Assumable – Both loan loans are assumable with a 1% fee. Keep in mind that the buyer has to be approved under the same guidelines as the original note holder, and will have to pay for a new appraisal. Almost all bank loans are not assumable.
Recourse – Both loans have non-recourse financing, which means the borrower doesn’t have to personally guarantee them. If there is a long recession just after a boom period where too many units were built at the same time, you might find the property running at a loss. With non-recourse financing, if you default on the loan, your personal assets are not at risk. In fact, all you have to do is give the property back to the lender. Ouch! I know that will hurt, but not as much as losing your home, your bank accounts or other personal assets.
Commercial Space – both loans will allow up to 35% of the square footage or up to 20% of the property’s gross rents to be occupied by commercial tenants, so if you have a mixed-use building with commercial tenants on the first floor this will be a plus for you.
Subordinate Financing – Both Fannie and Freddie do not allow subordinate financing known as a second mortgage, but for that matter banks don’t either, unless they do the second. Same with Fannie and Freddie – both have great supplemental loan programs.
Supplemental Financing – after the first year you can get a supplemental loan in second position from Fannie Mae or Freddie Mac in second position for up to 75% LTV. The property’s value has to go up enough to hit a minimum 1.10 DSCR with both loans combined along with the net operating income from raising rents. So it will likely take more like 2 – 3 years before this can be achieved. This second mortgage will be co-terminus with the first mortgage meaning they both mature on the same date.
Prepayment Penalties – are also very similar on both programs with a choice of Yield Maintenance or a declining prepayment penalty – like a 5,4,3,2,1. Loans with Yield Maintenance usually have the lowest rates. This can be a good prepayment penalty as low as 1.00%, as long as rates go in the right direction when you want to prepay. If they don’t, it can be prohibitively expensive to prepay the loan. Why is yield maintenance structured this way? It’s just that these loans are sold to investors that are promised a specific rate of return for the same number of years that your rate is fixed for. It’s not fair for you to decide to prepay the loan early – let’s say in 2 years if the investors were promised that rate of return for 10 years.
Borrower Financial Strength – Both programs require that the borrower’s NET WORTH be equal to or larger than the loan amount, and that you have at least 12 months of loan payments in cash when the loan closes – so you can’t be broke at closing.
Credit – Minimum 660 FICO score for Freddie Mac and 680 for Freddie with no bankruptcies in the past 4 years. Must have mitigating explanation for late pays, tax liens and bankruptcies.
Loan Fee – Both loan programs average a 1.00% loan fee.
Deposit to Start the Loan – Both loans require approximately $10,000 as a loan deposit at application to start the loan for the small loan program and about $20,000 for the large loan program – the difference is mostly to cover higher legal costs. For more complex ownership structures requiring more legal work the deposit will be higher.
Tax Returns – Both loan programs do not look at your personal income so tax returns are not required. This makes these loan programs similar to a stated income loan program with no debt to income ratio done. But the underwriter will look at all your businesses and investment properties to make sure they cash flow positively. They do not want you to have a loss that will put their loan at a higher risk. If you do, your loan will not be approved.
Minimum Occupancy – Both loan programs require 90% occupancy for 90 days and have a minimum economic occupancy of 75%.
Tax and Insurance Impounds – These are required and collected monthly with your mortgage payment.
Replacement Reserves – The lender is going to collect an average of $250 per unit per year to go into a rainy day fund that can be used to replace small things like a hot water heater or large items like resurfacing the parking lot or roof replacements. This would come to $2,500 per year for a 10 unit property. Why do these exist? Because the lender wants to make sure you have money put a side to keep the property in good condition, and this also ensures that the bonds representing these loans have a high credit rating.
How Fannie Mae and Freddie Mac Multifamily Programs are Different
Interest Rate – For the past 2 years, Freddie Mac Multifamily has had the lowest rates, but today they are just about equal. Both loan programs use corresponding US Treasury yields for the Index plus a margin. For example, if the 10 year treasury yield is 2.50% and the margin is 2.25%, the all in rate will be 4.75%. It seems that when treasury yields go up margins also go up, but this is not always the case. Fannie is by far preferable for very small, small, medium and secondary markets as the rates are the same for all cities based on population. Freddie on the other hand has the lowest rates in large markets like San Francisco and Seattle, and much higher rates in small markets.
Fixed Rate Terms – Fannie wins big here as you can fix the rate up to 30 years fully amortizing. With Freddie you can only fix the rate up to 10 years. The longer you fix the rate, the higher the rate on both loan programs.
Debt Service Coverage Ratio (DSCR) – Fannie has three tiers: 1.25, 1.35 and 1.55 DSCR with rates coming down 20 basis points as the DSCR is increased. Freddie’s DSCR is based on the size of the market – requiring a higher DSCR as the market gets smaller. Starting with 1.20 DSCR for large markets going up to 1.55 DSCR for very small markets.
Loan to Value (LTV) – The maximum loan to value for Fannie Mae is 80% and 75% for a cash out refinance. Freddie can go up to 80% LTV with or without cash out, but again, this is restrained by the size of the market.
Rate Lock – Freddie Mac has a huge benefit here as you can lock the rate at application and not worry about rates going up before you can close. With Fannie Mae, you have to wait until the loan is approved – about 45 days after application to lock the rate.
Borrower Experience – Fannie Mae requires the borrower to have a minimum of 2 years of prior multifamily ownership experience owning 5 units or more. If you owned a duplex or fourplex, this doesn’t count. Freddie Mac outshines here as the borrower does not need experience as long as they live within 100 miles of the property and hire professional management