Fannie Mae Small Loans vs Bank Loans for Apartments

Short answer

A Fannie Mae Small Loan goes up to $9 million on stabilized 5+ unit buildings, with 5- to 30-year terms, up to 80% LTV, a 1.25x minimum DSCR and non-recourse execution. A bank loan is usually shorter and often recourse, but easier to change and cheaper to exit. Long holds favor Fannie; short holds favor the bank.

The short version

For a stabilized building you plan to hold for seven years or more, a Fannie Mae Small Loan usually wins on term, recourse and leverage. For a building you may sell in two or three years, one that is mid-renovation, or one where your bank will lend on the strength of a long relationship, the bank loan often wins on flexibility and exit cost.

The rate is rarely what decides it. What decides it is how long you will keep the loan and what it costs to get out of it.

Side by side

Term	Fannie Mae Small Loan	Typical bank loan
Loan size	Up to $9 million nationwide	Set by the bank's capital and appetite
Property	Existing, stabilized, 5 or more units	Stabilized or transitional
Term	5 to 30 years	Commonly 3 to 7 years, then reprice or balloon
Amortization	Up to 30 years	Commonly 25 or 30 years
Max LTV	80%	Varies; often lower
Min DSCR	1.25x	Varies by bank
Rate	Fixed or variable	Fixed for the term, floating, or swapped
Recourse	Non-recourse available, with bad-act carve-outs	Full or partial personal guaranty is common
Ongoing tests	Sized at closing; reporting to a servicer	Often an annual DSCR covenant and deposit requirements
Escrows	Replacement reserves, tax and insurance typically required for higher leverage	Often waived for relationship borrowers
Prepayment	Yield maintenance or declining premium	Often a step-down, sometimes none
Rate lock	30- to 180-day commitments	Set at commitment or closing
Assumption	Typically assumable with approval	Usually not assumable
Extra proceeds later	Supplemental loans available	Ask the bank for a modification or new loan

The Fannie Mae column is from Fannie Mae's published Small Mortgage Loan term sheet. The bank column describes typical community and regional bank terms and varies widely, so read your own quote.

Where the Fannie Mae Small Loan wins

Term certainty. A bank loan that balloons in five years puts you back in front of a credit committee, in whatever market exists that year. A 10-year or longer fixed Fannie loan removes that refinance risk for the life of the hold.

No personal guaranty of the balance. Non-recourse execution means the lender's recovery is the property, except for losses caused by bad acts such as fraud and bankruptcy that the carve-out guaranty covers. For an owner whose net worth sits in several buildings, removing a guaranty on one keeps a problem there from reaching the others. Read bad-boy carve-outs before you sign.

No annual covenant test. The loan is sized at closing. A bad year at the property does not trigger a covenant default the way a bank's annual DSCR test can.

Assumability. If you sell, a buyer can typically assume a non-recourse Fannie loan with approval. When rates are higher than your coupon, that can be worth real money in a sale.

Where the bank wins

Cheap exits. A step-down prepayment on a bank loan costs a few points at most and shrinks each year. Yield maintenance on a fixed agency loan can cost much more if rates fall. If there is a real chance you sell or refinance early, price both exits before you choose. The refinance break-even calculator shows the math.

Transitional buildings. Fannie Small Loans are for existing, stabilized properties. A bank can lend on a building mid-renovation, with a lease-up underway, or with a short operating history.

Relationship lending. A bank may size on your global cash flow and deposits, not only on the property. That can produce a bigger loan than an agency lender's property-only underwriting.

Less paperwork after closing. No monthly replacement reserve, often no escrows, and reporting to someone you know.

The sizing check to run first

Before you tell your bank you are leaving, check whether the Fannie loan pays it off. A Fannie lender underwrites the property's NOI after its own adjustments: a vacancy floor, a management fee floor, replacement reserves, and trended taxes and insurance. Then it sizes to the lower of 80% LTV and the amount that covers debt service at 1.25x.

Say a 30-unit building shows $480,000 of NOI on your statement, and the lender's adjustments bring it to $450,000. At a 1.25x minimum, the lender allows $360,000 of annual debt service. That figure, not the 80% LTV, may set the loan amount. Run your own trailing-12 through the T-12 underwriting calculator, then test eligibility with the eligibility checker.

Cost to close

A bank renewal can close with an updated appraisal and little else. A Fannie Small Loan uses streamlined third-party reports, but you still pay for an appraisal, a property inspection and an environmental screen, plus the lender's legal fees, title and initial escrow and reserve deposits. On a small loan, those fixed costs are a larger share of proceeds. List them with the closing cost estimator.

How to decide

Write down your realistic hold period. Under three years, lean bank. Over seven, lean Fannie.
Decide whether you will sign a personal guaranty. If not, the bank needs to offer non-recourse, and few do on small loans.
Confirm the building is stabilized on paper, with a clean trailing-12 and rent roll.
Size the Fannie loan on the lender's NOI and confirm it pays off your bank.
Get both quotes and compare effective cost over your hold, including fees and the cost to exit, with the term sheet comparison.

For the full move, step by step, read refinancing a bank loan into agency debt. Fannie Mae publishes the lenders approved for its Small Loan program; see Fannie Mae DUS lenders.

Frequently asked questions

What is the maximum Fannie Mae Small Loan amount?

Fannie Mae's Small Mortgage Loan term sheet sets the program at up to $9 million nationwide, for existing, stabilized multifamily properties with five or more units, for acquisition or refinance. Terms run 5 to 30 years with up to 30-year amortization, a maximum 80% LTV and a minimum 1.25x DSCR. Individual lenders may set their own minimum loan size.

Is a Fannie Mae Small Loan non-recourse?

Fannie Mae's term sheet says non-recourse execution is available, with standard carve-outs for bad acts such as fraud and bankruptcy. That means the lender's recovery for the balance is generally the property, but you or a guarantor sign a carve-out guaranty that can make you personally liable for specific acts. Have an attorney review the guaranty before closing.

Why would I choose a bank loan over Fannie Mae?

Mainly flexibility. A bank loan usually has a lighter prepayment structure, so it costs less to sell or refinance early. A bank can lend on a building that is not yet stabilized and may size on your overall relationship. If you expect to sell within a few years or the building is in transition, a bank loan often fits better.

Can I get a Fannie Mae loan on a 5-unit building?

Fannie Mae's Small Loan program covers properties with five or more units. In practice, very small loans are harder to place because third-party reports and legal costs are similar to larger loans, and some lenders set minimum loan amounts. Ask each Small Loan lender for its minimum before you order any reports.

Does a Fannie Mae Small Loan require escrows?

Fannie Mae's term sheet says replacement reserves, tax and insurance escrows are typically required for higher-leverage transactions. At lower leverage, a lender may waive some of them. Ask each lender which escrows it will hold at your requested loan amount, because they reduce the net cash you receive at closing.